Comparative International Characteristics of Banking 

James R. Barth 

Auburn University and Milken Institute 

Gerard Caprio, Jr., 

World Bank 

Daniel E. Nolle 

Office of the Comptroller of the Currency 

Economic and Policy Analysis Working Paper 2004-1 

January 2004 

The views expressed in this paper are those of the authors alone and not those of the Office of 

the Comptroller of the Currency or the U.S. Treasury Department, nor The World Bank, its 

management, the Executive Directors, nor the countries they represent. A version of this paper 

will appear in A Companion to International Business Finance, Raj Aggarwal (editor), 

Blackwell Publishing, Inc., Malden, Massachusetts (forthcoming). We wish to thank Gary 

Whalen for helpful comments, Cindy Lee for excellent research assistance, and Amy Millen for 

editorial assistance. 

Please address correspondence to Daniel E. Nolle, Senior Financial Economist, Policy Analysis 

Division, Office of the Comptroller of the Currency, 250 E. Street, SW, Washington, DC 20219 

(phone: 202-874-4442; e-mail: daniel.nolle@occ.treas.gov) 
Comparative International Characteristics of Banking 

James R. Barth, Gerard Caprio, Jr., and Daniel E. Nolle 

Office of the Comptroller of the Currency 

Economic and Policy Analysis Working Paper 2004-1 

January 2004 

Abstract: This paper compares key characteristics of banking systems across countries. A basic 

premise underlying our review is that the increasing globalization of banking and finance 

mandate a broad, cross-country perspective on banking issues. Indeed, cross-country 

comparisons can add insight into basic issues in banking that may not emerge, or are only 

partially discernible, from single-country analyses. With this in mind, we review representative 

research dealing with four fundamental aspects of international banking: the structure of 

banking, with emphasis on the connection between the development of the banking system and 

economic growth; banking industry performance; banking regulation, supervision, and corporate 

governance; and banking crises. We augment each of these discussions with an examination of 

the cross-country “landscape” of key dimensions of banking, using data for over 50 countries.

1
I. Introduction 

Few would argue with the proposition that national policy makers, businesses, and 

analysts in countries everywhere must deepen their understanding and sharpen their awareness of 

foreign financial systems. The increased globalization and interconnectedness of business and 

finance provides one set of motives for this effort. In addition, there have been numerous 

banking and financial crises in the past two decades, and the effects of such crises have had 

wide-ranging repercussions around the world. Further, national policy discussion on banking 

and finance can benefit from an international perspective. International comparisons can reveal 

trends and norms that might be useful in debates about national banking and financial policies, 

and an awareness of banking and financial systems in other countries can promote the realization 

that national financial policies are likely to have an impact across borders.1

 This paper, which 

compares key characteristics of banking systems across countries, has been written with these 

ideas in mind. 

Our focus on bank systems in particular flows from several considerations. Recent 

research has established that the development of the financial system is crucial for the 

development of the economy as a whole. For all countries, the banking system is an important 

component of the financial system; for many countries, especially developing countries, the 

banking system is the dominant component of the financial system. In addition, many have 

pointed to the special nature of banks as financial intermediaries that simultaneously extend 

credit and administer the payments system, and are the conduit for monetary policy. Further, 

researchers and national and international policy makers have focused on the banking industry as 

a key actor in causing, and preventing, financial and economic crises. 

 

1

 Such awareness is of growing importance, given that 146 countries belong to the World Trade Organization 

(WTO) and are bound by the Annex on Financial Services, which took effect in 1999. See Alexander (2002) for a 

detailed discussion of issues arising under this arrangement. 

2
Throughout this paper we outline significant banking issues that have been addressed by 

an appeal to cross-country comparisons, citing representative studies relevant to each issue.2

 

Then we present and discuss data – some of it assembled here for the first time -- describing key 

facets of the international banking landscape relevant to these issues. The paper is organized as 

follows. Section II considers several important aspects of banking industry structure, including 

the relative size of banking industries, the degree of government and foreign ownership of 

banking, and the degree of market power in banking systems. Section III compares banking 

industry performance across countries. Section IV deals with several important aspects of the 

regulation and supervision of banks. These include the range of activities in which banks are 

permitted to engage; the structure, scope and independence of the supervisory system; the 

implementation of supervision; and deposit insurance schemes.3

 Section IV also investigates the 

corporate governance of banks, and presents cross-country comparisons of key aspects of this 

important dimension of banking. Section V briefly describes the incidences of banking crises 

around the world, and summarizes ideas about their causes and prevention. Section VI 

summarizes and concludes. 

II. Structure of Banking: Cross-Country Comparisons 

The financial development of the banking industry, the degree of government and foreign 

ownership of banks, and the concentration of economic power in the banking industry are all key 

 

2

 For an excellent survey of important aspects of 170 international comparative banking studies, see Brown and

Skully (2003). 

3

 The two words “regulation” and “supervision” do not refer to the same concept or process. As Jordan (2001) 

states, “regulation refers to the rules or procedures that are designed to govern an industry’s behavior. It is the 

prescriptions or boundaries imposed on the industry by legislators and regulatory bodies in an effort to ‘direct’ 

it....Supervision, on the other hand, is the monitoring or oversight function that takes place after the regulations 

have been passed. It ensures, among other things, that activities are conducted in accordance with those 

regulations.” 

3
dimensions of the structure of banking.4

 Since the development of several large cross-country 

comparative data sets in the past decade, researchers have investigated possible links among 

significant aspects of banking industry structure and economic growth, development, and 

stability. This section summarizes recent representative cross-country studies on financial 

development and the banking industry, government and foreign ownership of banking, and the 

competitiveness of banking industries. 

II.A. Financial Development and the Banking Industry 

Prior to the 1990s, relatively little research was directed to the issues of whether and how 

the financial system fostered economic growth.5

 The prevailing view was that economic growth 

leads financial sector growth, which responded to the wider and deeper development of markets 

for goods and services. However, within the last decade, a growing body of research has focused 

on the possible positive causal connection between the development of the financial system and 

overall economic development. This literature outlines several key ways in which financial 

systems contribute to economic growth: 

• Financial systems mobilize savings by offering savers a range of savings vehicles. 

• Financial systems allocate savings by using expertise individual savers do not possess to 

ascertain potential borrower creditworthiness. 

• Financial systems reduce risk to individual savers by diversifying pooled assets across 

many investment opportunities. 

• Financial systems generate liquidity by allowing savers to readily access savings while at 

the same time financial intermediaries fund long-term projects. 

 

4 What constitutes a “bank” varies across countries. This issue is explored in detail in section IV.A. below. 

5

 See Levine (1997), Kahn (2000), Khan and Senhdj (2000), Wachtel (2003), World Bank (2001), and Phumiwasana 

(2003) for surveys of the literature on the role of the financial system in economic growth. For a comprehensive 

survey of this literature as well as several other aspects of international comparisons of banking, see Brown and 

Skully (2003). These works and others point to a very limited pre-1990s literature on the subject, most particularly 

Goldsmith (1969) and McKinnon (1973). King and Levine (1993a and 1993b), Beck, Levine, and Loayza (2000),

and others point to Joseph Schumpeter’s insights in the early twentieth century as the intellectual antecedent to the 

recent literature on finance and growth. 

4
• Financial intermediaries contribute to risk management by monitoring borrowers and 

managers of enterprises to which credit has been extended. 

Researchers using cross-country data have begun to build a compelling case that financial 

sector development promotes economic growth, and much of this work focuses on the banking 

system. For example, King and Levine (1993a), using data for 80 countries for 1960-1989, find 

a significant positive relationship between several measures of financial development, including 

total credit extended to the private sector by banks, and economic growth. Their finding that the 

initial level of financial development in 1960 was a significant predictor of the subsequent 

average rate of growth over the next 29 years suggests a causal relationship between financial 

sector development and overall economic development.6

 More recently, Levine, Loayza and 

Beck (2000), using data for 74 countries, find that the exogenous component of financial 

intermediation is positively associated with economic growth. Also addressing the issue of 

causation, Rajan and Zingales (1998) used industry-level data for 41 countries in finding that 

industries more dependent on external financing tend to grow faster in countries with a higher 

level of financial system development, in which external financing – including credit extended 

by the banking sector – is easier to obtain. In a related vein, Demirgüç-Kunt and Maksimovic 

(2002) also use firm-level data across 40 countries to find that in more financially developed 

economies, a larger proportion of firms grew above the maximum rate of growth achievable by 

similar firms when they lacked access to external finance. 

 

6

 For a critique of early-1990s studies on finance and growth, see Arestis and Demestriades (1997), which focuses 

on a number of thorny methodological difficulties to be overcome in order to establish causality between financial 

development and economic development. Note, nevertheless, that as Bonin and Wachtel (2003, p.1) observe, “A

strong consensus has emerged in the last decade that well-functioning financial intermediaries have a significant

impact on economic growth.” Several single-country studies explore this issue. See, e.g., Bae, Kang, and Lim

(2002) using Korean data; Ongena, Smith, and Michalsen (2003) using Norwegian data; and Gan (2003a) using

Japanese data.

5
 The precise nature of causation between financial sector development and economic 

development remains under debate, and there is ample room for further research.7

 Nevertheless, 

future research must encompass an understanding of the nature of differences across the globe in 

the relative sizes of the banking and overall financial sectors. Consistent with the overall 

purpose of this chapter, we illustrate comparative cross-country information on these factors in 

Table 1 and Figure 1. Table 1 groups 55 countries by income level into four categories. The far 

left-hand column gives a measure of the size of the banking system relative to the economy, 

using the ratio of banking system assets to GDP for every country; the average bank-assets-toGDP ratio for each income group is also displayed. The second column from the left gives the 

rank of each country in terms of the relative size of the banking system. It is clear from the 

average bank assets-to-GDP ratio for each income group that, with a group average bank assetsto-GDP ratio of 343 percent, high income countries have larger, more developed banking 

systems compared with countries in the other income categories. This ratio tends to decline as 

income levels fall.8

There are some notable deviations from this pattern, including the United States, with a 

bank assets-to-GDP ratio of 66 percent. Taking into account not only the banking system, but 

also stock and bond markets, the U.S. has the largest financial system in the world. Hence, its 

relatively small bank assets-to-GDP ratio is not a reflection of an undeveloped banking system, 

but rather an indication of the relatively lower importance of the banking system compared with 

 

7

 Note that the debate on causation between financial sector development and economic growth is not entirely

resolved. See, for example, Wachtel (2003). 

8

 The growth of electronic finance may add a substantial dimension to the finance-and-growth dynamic, as discussed 

in Claessens, Glaessner, and Klingebiel (2001, and 2002). In particular, they point to evidence suggesting that, 

developing countries may be able to “leapfrog” past the development of some components of traditional financial 

services infrastructure by adopting online and remote delivery mechanisms for financial services. Both studies 

included detailed cross-country comparisons of e-finance. Though still at relatively modest levels in most countries, 

growth in some electronic delivery channels is significant across countries at different stages of economic 

development.

6
the stock and bond markets. Figure 1 illustrates the size of the banking system in selected 

countries to the total financial system, measured as bank assets plus bond market assets and stock 

market capitalization. 9 At 16 percent, the banking system in the U.S. is the smallest among 

these countries in this relative sense. In contrast, Germany has a banking system that is roughly 

four times as large in the same relative sense. It is for this reason that the U.S. is referred to as 

having a capital-markets-based financial system and Germany a bank-based system.

10

II.B. Ownership of Banking 

The ownership of banks is a key structural characteristic of banking on which some of the 

emergent cross-country banking literature has focused. Two facets in particular have received 

attention: the degree of government vs. private sector ownership of banks and foreign vs. 

domestic ownership of banks. 

Following the international banking crises of the mid-to-late 1990s, analysts and policymakers developed a keen interest in the degree to which the government is involved in a banking 

system. In general, government ownership of banks is likely to short-circuit market pressures on 

banks to make credit extension and investment decisions based on economic assessments of risk 

and return.

11 As a result, the likelihood of credit problems and poor profitability is typically 

higher for government-owned banks, leading to lower overall economic growth and to a greater 

likelihood of systemic banking problems. 

 

9

 Relatively few countries are illustrated in Figure 1 because bond market data is not available for many countries. 

Note that a branch of the finance and growth literature has focused on whether the composition of the financial 

system – in particular, whether it is bank-based or capital-markets-based – matters for economic growth. See, e.g., 

Levine and Zervos (1998), Beck and Levine (2002), and Levine (2002). The emerging consensus from this

literature is that: 1) the overall level of financial development matters, rather than the composition per se; and 2) that 

in any case, given the convergence of product offerings by banks and capital markets, the issue may be obviated by

market developments over time. 

10 For a comprehensive analysis of how and why the composition of financial systems differs across countries, see

Allen and Gale (2000). 

11 See, e.g., LaPorta, Lopez-de-Salinas, and Shleifer (2002), Wurgler (2000), Barth, Caprio, and Levine (2001a and 

2003) and Barth, Brumbaugh, Ramesh, and Yago (1998).

7
Table 1 shows the extent of government ownership of banks in 55 countries, based upon 

the percent of bank assets that are government-owned. There is wide variation across the world 

in the extent of government ownership of banks, from 0 percent in about one-third of the 

countries, to 80 percent in one country, India. Looking at the average degree of government 

ownership across the four income groups, it is also clear that, at 11 percent, the wealthiest 

countries have the lowest percent of government ownership of banking, and the poorest countries 

have the highest government ownership average, at 36 percent. The difference between the 

government ownership percentage for high income countries and for low income countries is 

statistically significant. 

In the wake of the international banking crises of the 1990s, research has focused on the 

role of foreign banks.12 A growing number of studies have found evidence that foreign bank 

entry tends to benefit the host country, particularly in emerging markets.13 Foreign bank entry 

may

• stimulate competition in the banking industry, leading to higher efficiency for domestic 

banks; 

• result in improvements in the quality and accessibility to financial services for host 

country firms and individuals;14

• result in the transfer to domestic banks of improved banking skills and technology. 

• enhance a country’s access to international capital. 

• lead to improvements in host country supervision and regulation, as suggested by Levine 

(1996) and Crystal, Dages, and Goldberg (2002).15, 16

 

12 Of course, research on the impact of foreign banks on the domestic economy preceded the banking crises of the

1990s. See, e.g., Goldberg and Saunders (1981) and Walter and Gray (1983). 

13 See, e.g., Claessens, Demirgüç-Kunt, and Huizinga (2001), Crystal, Dages, and Goldberg (2002), and Caprio and

Honohan (2002).

14 Demirgüç-Kunt, Levine, and Min (1999), using an indicator of foreign bank presence, find that the presence of

foreign banks does indeed influence domestic bank efficiency. 

8
The story has a number of complexities, however. Foreign banks may perform

differently in economies at different income levels, and hence their overall impact on the host 

economy may vary. For example, Claessens, Demirgüç-Kunt, and Huizinga (2001) found that 

foreign banks outperform (and therefore may competitively stimulate) domestic banks in 

developing countries, but underperform home-country banks in developed countries.17 In 

addition, Morgan and Strahan (2003) found that foreign bank entry can result in greater business 

cycle volatility. Because of the variety of effects from foreign bank entry, and its relatively high 

public policy profile, further research on it is warranted. 

As with the issue of government ownership of banks, it is useful to review the crosscountry landscape on the relative importance of foreign banking. Table 1 gives one measure of 

the presence of foreign banking across countries, using the percent of bank assets that are foreign 

owned. Foreign ownership of bank assets ranges widely, from 0 percent (Saudi Arabia) to 99 

percent (New Zealand). Looking across country groups, upper-middle-income level countries 

stand out: at 37 percent, they have a significantly higher proportion of foreign ownership of bank 

assets compared to any of the other three groups. Interestingly, the high income countries show 

about the same average percent foreign ownership of bank assets as the low income countries. 

 15 Crystal, Dages, and Goldberg (2002, p.1) suggest this may occur because the entry of foreign banks encourages 

“higher standards in auditing, accounting and disclosure, ... [and] credit risk underwriting. In addition, the entry of 

foreign banks could affect the supervisory system within a country by an indirect route: foreign entry could result in

the “importation” of supervision, due to the oversight that home country supervisors exercise. 

16 As Claessens, Glaessner, and Klingebiel (2001 and 2002) point out, with the emergence of electronic banking, 

foreign “entry” need not be accomplished through establishing a physical presence. Although cross-border ebanking – where a bank located in a particular “home” country offers services to “host” country customers via, for 

example, the Internet – is still relatively rare, its potential is significant enough to have caused the Basel Committee 

on Bank Supervision to produce risk management documents on the issue. See Basel Committee (2002). 

17 This second finding is consistent with some single-country studies of foreign banks. See, e.g., DeYoung and 

Nolle (1996). 

9
Overall, the data do not reveal a simple relationship between country income level and degree of 

foreign ownership of banking assets. 

II.C. Competition in Banking 

A key aspect of banking structure that has received a good deal of attention traditionally 

in single-country studies is the degree of competition in banking. Recently, there has been a 

growing interest in cross-country comparisons of competition in banking.18 Much of this work 

has focused on the effects of concentration. This is in response in part to the traditional 

structure-performance research originating in industrial organization theory and subsequently 

transferred over to single-country studies of banking that emphasized the concentration ratio as a 

key variable in explaining industry performance. But, as most recent research admits, 

concentration ratios (of bank assets or deposits) are not necessarily the best measure of the 

degree of competitiveness in a banking industry.19 A few studies have tried to gauge the 

contestability of banking markets across countries,20 but most recent comparative international 

research has used data on concentration ratios, albeit with reservations, because reliable crosscountry data is now widely available. 

This new body of research has recognized that concentration in banking may play a more 

complex role than traditionally hypothesized for nonfinancial industries.21 For example, with 

respect to the pricing and availability of banking services -- which in turn affect economic 

 

18 See Claessens and Laeven (2003) and Cetorelli (2003) for surveys of recent research on this topic. 

19 See Claessens and Laeven (2003) for an example of this point. 

20 Claessens and Laeven (2003) is a noteworthy recent example. 

21 Allen and Gale (2003) emphasize this point. Note that industrial organization theory has long recognized that the 

relationship between industry concentration and performance is far from clear-cut. See, e.g., the famous survey by

Weiss (1974). 

10
growth and development -- concentrated banking markets could lead to less lending at higher 

costs to borrowers, especially smaller firms, which in turn has negative effects on economic 

growth and development.22 However, as Rajan (1992), Cetorelli (2003), Claessens and Laeven 

(2003) and others have pointed out, the higher the market power, the more likely are banks to 

invest in information gathering about firms. The reasons for this are that they are more likely to 

be of sufficient size to gather and process relatively costly-to-obtain information about opaque 

firms, and because they are more likely to be able to enjoy monopoly rents from having done so. 

As a consequence, high concentration could lead to greater access to credit for firms, and hence 

improved economic growth and development. 

The empirical evidence is mixed, however. Bikker and Groeneveld (2000), for example, 

found negative effects for concentration on banking industry competitiveness in the European 

Union, while Claessens and Laeven (2003) found “no evidence that banking system

concentration negatively relates to competitiveness.”23 Beck, Demirgüç-Kunt, and Maksimovic 

(2003) found a complex relationship between bank concentration and access to external finance: 

concentration increases obstacles to financing and therefore decreases the likelihood of firms 

receiving bank financing, a result that grows weaker as firm size increases. However, they also 

found that this relationship fades in countries with good contract enforcement, an emphasis on 

the rule of law, low corruption, and good corporate governance. In addition, higher levels of 

economic and financial sector development, and a larger share of foreign banks reduce the 

negative impacts of high concentration, while a larger share of government ownership of banks 

 

22 Cetorelli (2003) lists several recent theoretical studies supporting this hypothesis. 

23 Claessens and Laeven (2003), p. 35. 

11
and higher restrictions on permissible activities for banks enhances the deleterious effects of 

concentration. 

There is also controversy in the relatively small amount of research on the relationship 

between bank concentration and financial system stability.24 On the one hand, as Allen and Gale 

(2003) have pointed out, less concentrated banking systems with many small banks may be more 

prone to crises than a concentrated banking industry with a few large banks, which may be able 

to diversify risks better. In addition, a few large banks may enjoy higher profits and therefore 

have a cushion against adverse shocks as compared to a system with many small banks.25 

Further, it may be easier for regulators and shareholders to monitor a few large banks, as 

compared to a system of many small banks. On the other hand, a system with a few large 

dominant banks may be more prone to crisis if such large banks operate under a “too-big-to-fail” 

policy that encourages moral hazard behavior. In addition, large banks also tend to be more 

complex than smaller banks, and hence may be more, not less, difficult for regulators and 

shareholders to monitor. Finally, banks with greater market power may tend to charge higher 

prices for banking services, which may induce client firms to assume greater risks in order to 

recoup expenditures.26 In their empirical investigation of the relationship between concentration 

and financial stability in 79 countries, Beck, Demirgüç-Kunt, and Levine (2003) found that crises 

are less likely in more concentrated banking systems. 

 

24 See Beck, Demirgüç-Kunt, and Levine (2003) for an insightful synopsis of this literature. 

25 Theoretical research in this vein includes Gan (2003b), Hellman, Murdock, and Stiglitz (2000), Keeley (1990), 

and Marcus (1984). Gan (2003c) provides empirical evidence of a link between market structure and financial

stability, using data on the Texas real estate crisis in the 1980s. 

26 Beck, Demirgüç-Kunt, and Levine (2003) point to a recent study by Boyd and De Nicoló (2003) for this

hypothesis. 

12
Given the controversy that surrounds the issue of competitiveness of the banking industry 

and its impact on the economy, as well as the recent vintage of the still relatively small amount 

of analysis, more research is warranted. It is also useful to consider relevant information on the 

competitive banking landscape across countries. Table 1 provides two measures of banking 

competitiveness. The first is the 3-bank concentration ratio, measuring the percent of banking 

system assets held by the top three banks. As Table 1 illustrates, this ratio varies widely across 

countries, from a high of 97 percent in Finland to a low of 16 percent in the United Kingdom. 

Looking at the average value of the concentration ratio for each of the four income groups of 

countries, there does not appear to be much variation, with each group close to the overall 

average of 51 percent. As a consequence, no simple pattern appears to exist between

concentration and the level of economic development. 

Another measure of market power that is sometimes used is net interest margins, under 

the reasoning that the greater the degree of competition in a banking system, the lower will be 

the spread between the interest rates banks charge their customers and their own interest 

expenses.27 Table 1 also presents net interest margins as a percent of total assets across 

countries. As with the 3-bank concentration ratio, figures vary widely across countries, with 

lower margins indicating less market power in the banking system.

28 Unlike the case of the 

concentration ratio, however, there appears to be a pattern in the relationship between the level 

 

27 But see Demirgüç-Kunt, Laeven, and Levine (2003) for a number of complicating factors surrounding this

reasoning. Note also that net interest margins can be interpreted as a gauge of the degree of efficiency in the 

banking industry, under the related reasoning that in a more competitive banking system the drive for efficiencies 

will squeeze margins. 

28 Obviously this measure, as well as any other single measure, must be viewed cautiously. For example, the low 

figure in Table 1 is –3.84 for Indonesia, certainly more a reflection of that system’s banking crisis than a solid 

measure of relative market power. 

13
of economic development (as represented by income level) and average net interest margins. In 

particular, the higher the level of economic development, the lower is market power in banking. 

III. Performance of Banks: Cross-Country Comparisons 

As with banking structure, there are noteworthy differences across countries in banking 

industry performance. Table 2 shows several measures of banking performance across 55 

countries using data for 1999. Two measures of bank profitability are included: return on assets 

(ROA) and return on equity (ROE). Both measures show wide variation across countries, and 

although they do not necessarily run in tandem, countries stand in roughly the same position 

relative to each other by either measure.29 Looking at the averages for the four income level 

groups, a clear-cut positive correlation exists between ROE and income level. The pattern is not 

as clear in the case of ROA, although the two highest income groups show a considerably greater 

average ROA than the two lowest. 

Single-country studies of bank profitability have focused on bank-specific variables as 

key determinants.30 As large-scale cross-country databases have recently been developed, 

researchers have investigated determinants of bank profitability going beyond the rather narrow 

set of explanatory variables used in single-country studies. Demirgüç-Kunt and Huizinga (1999) 

is representative of this newer approach. That study of more than 5000 banks in 80 countries 

over the 1988-95 period, found that in addition to bank-specific factors, such as the equity-toassets and loans-to-assets ratios, macroeconomic conditions (especially the level of economic 

 

29 These gauges of profitability do not always run in tandem, because a bank with a higher equity ratio will tend to

have a higher ROA and a lower ROE than a bank with a lower equity ratio. As Demirgüç-Kunt and Huizinga

(1999) point out, in some developing countries banks operate with very low equity capital, in part because there may

be implicit government guarantees, and as a consequence their ROEs are high but do not reflect bank soundness. 

30 Although as Barth, Nolle, and Rice (1997) note, there does not seem to be a strong consensus on what constitutes 

the “core” model for explaining bank profitability. 

14
development), deposit insurance regulation; degree of foreign ownership; and legal and 

institutional factors, such as the effectiveness of contract enforcement, all play a role in 

explaining (pre-tax) ROA. Subsequent studies, such as Demirgüç-Kunt and Huizinga (2001) that 

focused on the role of financial structure, and Barth, Nolle, Phumiwasana, and Yago (2003) that 

focused on the role of banking system supervisory structure, scope, and independence, broadly 

ratified these findings and offered extensions of the determinants of bank profitability by 

appealing to cross-country data sets. 

Another gauge of bank performance illustrated in Table 2 is the ratio of noninterest 

revenue to total revenue. This ratio gives a measure of the degree to which a bank relies on 

noninterest-bearing, fee-generating activities relative to “traditional” interest-bearing activities, 

such as commercial and real estate loans. It may be a rough proxy for the degree of innovation 

in which banks are willing to engage, and/or a measure of their ability to diversify risks.31 

Consistent with this interpretation, the ratio of noninterest revenue to total revenue is much 

higher for the high income countries on average than for the other country income groups. On 

the other hand, consistent with Demirgüç-Kunt and Huizinga (1999), who found that a relatively 

high ratio of noninterest earning assets had a negative impact on profitability, Table 2 shows that 

the lowest income group of countries has a relatively high ratio of noninterest revenue to total 

revenue. It is possible, therefore, that this variable captures different dynamics for developed 

compared with developing countries.32

Table 2 also displays data across countries for a standard measure of credit quality – 

nonperforming loans to total loans. Despite the fact that countries use different accounting and 

 

31 On the former point, see Furst, Lang, and Nolle (2002); on the latter point, see Stiroh (2002). 

32 One possibility is that a large proportion of noninterest revenue may be accounted for by deposit charges and 

similar fees which are directly tied to “traditional” interest-bearing services, and hence are not reflective of product 

diversification. The authors thank Gary Whalen for this insight. 

15
regulatory standards for classifying impaired loans with, in general, the less developed countries 

using less rigorous standards, there is a clear-cut negative pattern between income level groups 

and nonperforming loans to total loans. This is consistent with other gauges of bank 

performance showing overall weaker banking systems in less developed countries. 

A final important dimension of bank performance meriting attention is efficiency. The 

comprehensive and oft-cited survey of bank efficiency studies by Berger and Humphrey (1997) 

included only six cross-country studies. There are significant difficulties even in single-country 

studies of bank efficiency in measuring both inputs and outputs in banking, making estimation of 

efficiency difficult; these problems are magnified for cross-country studies where such inputs 

and outputs data as exist are not standardized across countries.33 Nevertheless, the gap in crosscountry analyses and comparisons of bank efficiency has begun to be addressed, as noted, for 

example in Brown and Skully (2003). Although it is perhaps too early to point to the kind of 

“stylized facts” that have emerged from cross-country banking studies in other respects, it is 

possible to get a rough idea of what the cross-country landscape may resemble. Table 1 includes 

information across countries on net interest margins, which are commonly regarded as indicative 

of overall banking efficiency, under the argument that in more efficient banking systems the gap 

between the rates banks receive on, and pay for, funds will be relatively small because of 

competitive pressures.34 In the event, the country income group averages show that higher 

income countries have lower net interest margins, consistent with the expectation of more 

efficient banking in more developed countries. 

 

33 See Brown and Skully (2003) for a concise explanation of these data and methodological problems. 

34 See, e.g., Demirgüç-Kunt and Huizinga (1999). 

16
IV. Regulation, Supervision, and Corporate Governance of Banking 

The banking industry is regarded as being different from other industries. The reasoning 

for regarding banks as “special” was aptly summarized by Corrigan (1982), who argued that 

banks: 

• provide transactions services and administer the payments system; 

• supply backup liquidity; 

• are the conduit through which monetary policy is administered. 

Consequently, a systemic crisis in the banking system can spread throughout the economy. 

Many have argued that contagion and systemic problems are more common in banking than in 

other sectors. In light of this, all governments regulate and supervise banks, although regulatory 

and supervisory approaches and measures differ across countries.35

This section compares the regulation, supervision, and corporate governance of banks 

across countries, focusing on several significant aspects and issues surrounding these dimensions 

of regulation and supervision. Examined across countries are: 

• the range of activities in which banks are permitted to engage; 

• the way in which banking supervision is structured, the scope of the authority of banking 

supervisors, and their relative independence from political and other influences; 

• differences in the implementation of supervision; 

• deposit insurance systems; 

• the nature of corporate governance in banking systems. 

 

35 As noted earlier, “regulation” refers to the set of laws and rules applicable to banking, and “supervision” is

defined as the monitoring by authorities of banks’ activities and the enforcement of banking regulations. Barth, 

Nolle, Phumiwasana, and Yago (2003, p. 70, footnote 7) refer to a line of reasoning that has been developed

explaining why banks should not be regulated. 

17
IV.A. Regulation: Permissible Activities for Banks 

The banking industry is regulated and supervised in every country, but wide differences 

separate the activities in which banks are permitted to engage. Some countries restrict banks to a 

narrow range of activities, whereas others allow them to engage in a broad array. Since it is the 

scope of activities that essentially defines the term “bank,” a bank is therefore not the same in 

every country around the world.36 It is the regulatory authorities, moreover, that not only 

determine the extent to which the activities of banks differ across countries, but also the extent to 

which they differ from nonbank-financial and nonfinancial firms within countries. 

Table 3 presents information on the differences in permissible activities for banks in 

countries grouped by income level. The activities include the ability of banks to engage in the 

business of securities underwriting, brokering, and dealing; insurance underwriting and selling; 

and real estate investment, development, and management. Permissible activities also include 

the degree to which banks may own nonfinancial firms and vice versa. The degree to which 

these activities are restricted are denoted by the terms unrestricted, permitted, restricted and 

prohibited. These designations are based upon Barth, Caprio and Levine (2001b), with each 

country’s regulations concerning each of these activities rated on the degree of restrictiveness 

from 1 to 4.37 These numbers correspond to the four designations, unrestricted through 

 

36 For an interesting discussion of the evolution of the legal definition of a bank in the U.S., see Haubrich and Santos

(2003, pp.147-148). In a similar vein, there is the issue as to what is meant by the term “banking product.” To a 

growing extent product convergence is occurring, in which similar financial products are offered by different

financial service industries. The regulatory and supervisory issue is that those products may in effect receive 

different regulatory treatment because they are being offered from differently regulated industries. For example, 

there is a growing similarity between performance standby letters of credit typically issued by banks, and surety 

bonds typically issued by insurance firms. 

37 More specifically, unrestricted means a full range of activities can be conducted in the bank; permitted means a 

full range of activities can be conducted, but some or all must be conducted in subsidiaries; restricted means less 

than a full range of activities can be conducted in the bank or subsidiaries; prohibited means the activity cannot be

conducted in either the bank or subsidiaries. For bank ownership of nonfinancial firms: unrestricted means a bank

may own 100 percent of the equity in any nonfinancial firm; permitted means a bank may own 100 percent of the 

equity in a nonfinancial firm, but ownership is limited based on a bank's equity capital; restricted means a bank can 

18
prohibited, with the higher number indicating greater restrictiveness. This approach enables one 

to construct a narrow index of activities restrictiveness (i.e., securities, insurance, and real estate) 

as well as an overall restrictiveness index (i.e., the activities restrictiveness plus the 

restrictiveness of bank ownership of nonfinancial firms and vice versa). The narrow index may 

range in value from 3 to 12, while the overall index may range in value from 5 to 20.38 

Table 3 shows that securities activities are the least restricted and real estate activities are 

the most restricted in countries across all income levels. Indeed, not a single country prohibits 

banks from engaging in securities activities. In contrast, one-fourth of the 55 countries prohibit 

them from engaging in real estate activities. Although no country prohibits all three activities, 

Mauritius comes the closest by prohibiting banks from engaging in insurance and real estate 

activities and restricting their securities activities. India is interesting because it also prohibits 

insurance and real estate activities for banks yet allows them unrestricted securities activities. At 

the other end of the restrictiveness spectrum, three countries grant banks unrestricted securities, 

insurance, and real estate powers – Germany, New Zealand, and Switzerland. Recently, a few 

countries have become more liberal in granting banks broader powers. The U.S., for example, 

with the enactment of the Gramm-Leach-Bliley Act (GLBA) in late 1999, now permits rather 

than restricts banks’ access to both securities and insurance activities.39 

The degree of restrictiveness on the mixing of banking and commerce also displays 

substantial variation across countries. Bank ownership of nonfinancial firms is more restricted 

 only acquire less than 100 percent of the equity in a nonfinancial firm; prohibited means a bank may not acquire any

equity investment in a nonfinancial firm. For nonfinancial firm ownership of banks: unrestricted means a 

nonfinancial firm may own 100 percent of the equity in a bank; permitted means unrestricted, but need prior 

authorization or approval; restricted means limits are placed on ownership, such as a maximum percentage of a 

bank's capital or shares; prohibited means no equity investment in a bank is allowed.

38 The simple correlation between these two indexes is a positive and statistically significant 0.91. 

39 See Barth, Brumbaugh, and Wilcox (2000). Note that the data for Table 3 was collected pre-GLBA. 

19
than nonfinancial firm ownership of banks. Only 15 percent of the countries allow banks 

unrestricted ownership of nonfinancial firms, whereas 40 percent allow unrestricted ownership of 

banks by nonfinancial firms. Table 3 shows that no country prohibits the mixing of banking and 

commerce.40

Based on the index of overall restrictiveness, the least restrictive country is New Zealand, 

while Japan, Mauritius, and El Salvador are tied for being the most restrictive. More generally, 

there is a tendency for high income countries to be less restrictive than countries in the three 

other income groups. Specifically, the value of the narrow index of activities restrictiveness is 

statistically significantly lower for high income countries than the other three groupings. The 

value of the overall index is also statistically significantly lower for the high income countries 

than the upper and lower middle income countries, but not for the low income countries. 

Despite the differences among countries in the regulatory treatment of permissible 

activities for banks, the ultimate goal of bank regulation and supervision is to promote systemic 

stability. Additionally, regulation and supervision may also be aimed at promoting the 

development and efficiency of the banking sector. The important issue is what mix of 

permissible activities is best for banks in each country around the world to achieve these goals. 

At the theoretical level, there are arguments on both sides of the issue. The main reasons for 

restricting the permissible activities of banks are as follows. First, conflicts of interest may arise 

when banks are allowed to engage in a diverse group of activities.41 Second, banks will have 

more opportunities to increase risk when allowed to engage in a broader range of activities, 

 

40 As a result of GLBA, however, the U.S. in some respects has tightened restrictions on the mixing of banking and 

commerce. 

41 See, e.g., Edwards (1979) and John, John and Saunders (1994). 

20
which they are more likely to do when they have access to deposit insurance.42 Third, the wider 

the range of activities, the greater the formation of financial conglomerates that may be 

extraordinarily difficult to supervise.43 Fourth, large institutions may become so politically and 

economically powerful that they become “too big to discipline.” Lastly, the creation of financial 

conglomerates may reduce competition and thus efficiency in the financial sector. 

There are theoretical reasons, however, for allowing banks to engage in a broad range of 

activities. Fewer regulatory restrictions on the activities of banks may: 

• permit the exploitation of economies of scale and scope in gathering and processing 

information about firms, managing different types of risk for customers, advertising and 

distributing financial services, enforcing contracts, and building reputational capital with 

clients; 

• increase the franchise value of banks and thereby enhance their incentive to behave 

prudently; 

• lead to diversified income streams and thus create more stable banks; 

• limit the ability of the government to use banks to allocate funds to less productive 

projects, and thereby promote bank performance and stability.44

Although existing empirical studies do not fully resolve these theoretical debates, most of 

the literature suggests there are positive benefits from permitting banks broad powers. For 

instance, Berger and Udell (1996), DeLong (1991) and Ramirez (1995, 2002) find that expanded 

banking powers are associated with a lower cost of capital and less stringent cash-flow 

constraints. Vander Vennet (1999), moreover, finds that unrestricted banks have higher levels of 

operational efficiency than banks with more restricted powers. In terms of diversification, 

 

42 See, e.g., Boyd, Change and Smith (1998). 

43 Michael Camdessus (1997), e.g., remarked that we are witnessing “...the organization of financial conglomerates, 

whose scope is often hard to grasp and whose operations may be impossible for outside observers -- even bank

supervisors -- to monitor.” 

44 Saunders (1994) provides a good review that focuses specifically on the potential benefits and costs of mixing 

banking and commerce. 

21
Eisenbeis and Wall (1984) and Kwan and Laderman (1999) argue that because profits from

providing different financial services are not highly correlated, there are diversification benefits 

from allowing broader powers. Furthermore, Ang and Richardson (1994), Kroszner and Rajan 

(1994), Puri (1996), and Ramirez (1995) find that broad banks did not systemically abuse their 

powers in the pre-Glass-Steagall days of the U.S. Gande, Puri and Saunders (1999), moreover, 

find that allowing banks’ securities powers enhances competition. 

Drawing upon a comprehensive cross-country dataset, Barth, Caprio and Levine (2001a) 

find that greater regulatory restrictions are associated with: (1) a higher probability of a country 

suffering a major banking crisis, and (2) lower banking-sector efficiency. They found no 

countervailing positive effects from restricting banking-sector activities. Regulatory restrictions, 

for example, were not closely associated with less concentration, more competition, or greater 

securities-market development. 

More recently, Barth, Caprio, and Levine (2003) examine a much larger group of 

countries and find that restricting bank activities is negatively associated with bank performance 

and stability, as compared to when banks can diversify into other financial activities. Although 

theory provides conflicting predictions about the implications of restricting the range of bank 

activities, the results are consistent with the view that broad banking powers allow banks to 

diversify income sources and enhance stability. Their finding, moreover, is not due to reverse 

causality.45 Furthermore, extending their earlier study, they control for official supervisory 

practices, capital regulations, regulations on competition, government ownership of banks, and 

the moral hazard engendered by generous deposit insurance schemes. The negative relationship 

between restricting bank activities and bank development and stability therefore does not seem to 

 

45 See Barth, Caprio, and Levine (2001a) for a discussion of this issue. 

22
be because of an obvious omitted variable. Furthermore, they find no evidence that restricting 

bank activities produces positive results in particular institutional or policy environments. 

Specifically, they do not find improvements in bank performance or stability from restrictions on 

bank activities in economies that offer more generous deposit insurance, have weak official 

supervision, ineffective incentives for private monitoring, or that lack stringent capital standards. 

IV.B. Supervision: Structure, Scope, and Independence 

Banking crises, rapid structural change, and the continuing globalization of banking have 

led national and multilateral policy makers to focus increased attention on the crucial role of

banking supervision. This focus is reinforced by the fact that “...one of the important 

[international] trends has been, and continues to be, a move away from regulation and towards 

supervision.”46 Policy discussions specifically focus on several issues that must be addressed in 

establishing and maintaining effective supervision, including the structure, scope, and 

independence of bank supervision. Should banks be subject to one or multiple supervisory 

authorities? Should the central bank be involved in bank supervision? Should bank supervisory 

authorities supervise other financial service industries, including in particular securities and 

insurance? To what degree should bank supervisors be subject to political and economic policy 

pressure and influence? How these issues are addressed is important because policies that fail to 

provide for an appropriate bank supervisory framework may undermine bank performance and 

even lead to full-scale banking crises.

The intense interest policy makers have shown in these issues has not been reflected in 

research, in part because of data limitations. In particular, little systematic empirical evidence 

exists on how, or indeed whether, the structure, scope, and independence of bank supervision 

 

46Crockett (2001).

23
affect the banking industry. One recent study addressing this gap is Barth, Nolle, Phumiwasana, 

and Yago (2003).47 That study summarizes the policy debates surrounding these issues, drawing 

on a growing conceptual literature. It also examines whether and how the structure, scope, and 

independence of banking supervision affect a key dimension of bank performance – bank 

profitability. The results indicate, at most, a weak influence for the structure of supervision on a 

particular dimension of bank performance. 

A key policy decision in designing the structure of the bank supervisory system is 

whether there should be a single bank supervisory authority or multiple supervisors. Although 

previous conceptual literature covers a number of possible advantages and disadvantages to each

option, perhaps the strongest reason for some to advocate a single supervisory authority is 

because they fear a “competition in laxity” between multiple supervisors, while those who favor 

a system with two or more bank supervisors stress the benefits of a “competition in ideas” among 

multiple supervisors.48

One essential set of information largely missing from the previous literature on the issue 

of the structure of supervision is what different countries around the world have chosen to do, 

perhaps reflecting the view that as with financial systems themselves, there may be many roads 

to an adequate system. Table 5 provides information on the international “landscape” of bank 

supervisory structure. The vast majority of countries have a single bank supervisory authority. 

Nevertheless, 16 percent of the 55 countries, including the U.S., assign banking supervision to 

 

47 Martinez and Rose (2003) address the issue of “integrated” supervision of banking and securities firms and/or

insurance firms using results from a survey of 15 countries with such systems. 

48 See Barth, Nolle, Phumiwasana, and Yago (2003, pp. 70-73) for a detailed discussion of the advantages and 

disadvantages of single supervisor and multiple supervisors systems of bank regulation. Also, see Barth, Dopico,

Nolle and Wilcox (2002). 

24
multiple supervisory authorities. There is no systematic pattern to the division between single 

and multiple supervisory regimes across geographical regions or country income levels.49

Countries must also decide whether to assign responsibility for bank supervision to the 

central bank. As with the issue of single or multiple bank supervisors, the conceptual literature is 

split on the relative advantages and disadvantages of the central bank being a bank supervisor.

50 

Perhaps the most strongly emphasized argument in favor of assigning supervisory responsibility 

to the central bank is that as a bank supervisor, the central bank will have first-hand knowledge 

of the condition and performance of banks. This in turn can help it identify and respond to the 

emergence of a systemic problem in a timely manner. Those pointing to the disadvantages of 

assigning bank supervision to the central bank stress the inherent conflict of interest between 

supervisory responsibilities and responsibility for monetary policy. The conflict could become

particularly acute during an economic downturn, in that the central bank may be tempted to 

pursue a too-loose monetary policy to avoid adverse effects on bank earnings and credit quality, 

and/or encourage banks to extend credit more liberally than warranted based on credit quality 

conditions to complement an expansionary monetary policy. 

As with the single-multiple supervisor debate, a useful first step in addressing the debate 

over the bank supervisory role of the central bank is to ascertain basic facts. Table 4 compares 

the bank supervisory role of the central bank in 55 countries. Almost two-thirds of those 

countries assign banking supervision to the central bank, including 53 percent in which the 

central bank is the single bank supervisory authority. Like the U.S., a few countries (13 percent 

 

49 Briault (1999, pp.15-16) briefly discusses the issue of a transnational financial services supervisor. See also the 

discussion in the Economist (2002). Transnational issues also come into play in the debate over financial 

supervision in the European Union. See, e.g., Lannoo (2000), and International Monetary Fund (2001), Goodhart

(2002), and Schüler (2003). 

50 See Barth, Nolle, Phumiwasana, and Yago (2003, pp.73-76) for a detailed discussion of this literature. 

25
of the total) give bank supervisory authority to the central bank and at least one other agency 

(i.e., have a multiple supervisory system, and assign bank supervisory authority to the central 

bank). 

Much of the discussion about consolidating financial services supervision takes as its 

starting point the observation that financial service companies are growing increasingly complex. 

Financial conglomerates that operate in the banking, securities, and insurance industries are 

among the most powerful corporations in many countries. Some have argued that a supervisor 

with broad scope to cover all financial services is necessary to supervise such entities effectively

and, in particular, to insure that supervisory oversight of risk management by such 

conglomerates is not fragmented, uncoordinated, or incomplete. The most significant argument 

against a supervisory authority with broad scope is that it would result in an undue concentration 

of power that would otherwise be dispersed among several agencies. This could increase the 

likelihood of regulatory capture and retard financial innovation.51

Table 4 presents an international comparison of the scope of supervision across countries. 

In the majority of countries (58 percent) the authority responsible for bank supervision is 

confined only the banking industry. However, bank supervisory authorities also supervise 

securities firms in 13 percent of the countries, and insurance firms in 11 percent of the countries. 

In 8 countries (15 percent), the authority(ies) responsible for bank supervision also supervises

both securities and insurance firms. 

A third bank supervision issue has begun to receive far greater attention from researchers 

in the wake of numerous recent and costly banking and currency crises. Consensus is arising 

from the burgeoning research on the causes of banking and currency crises that independence for 

 

51 See Barth, Nolle, Phumiwasana, and Yago (2003) for a detailed discussion of this issue. 

26
supervisory authorities is crucial for well-functioning banks and for financial system stability.52 

Supervisors are "independent" to the extent that they are insulated from, or able to resist, 

pressure and influence to modify supervisory practices in order to advance a policy agenda that 

is at odds with the maintenance of a safe and sound banking system. Supervisory independence 

allows bank supervisors to monitor the financial condition of banks in a strictly professional and 

consistent fashion. In addition, it allows them to elicit the appropriate level of responsiveness to 

the guidance, constructive criticism, and direction they give to banks. In essence, supervisory 

independence makes it possible for supervisors to “call it like they see it” and to have their 

advice and orders heeded. 

Using information from the World Bank as described in Barth, Caprio and Levine 

(2001b), Barth, Nolle, Phumiwasana, and Yago (2003) construct an index of the degree of 

independence bank supervisors possess. The index, with values from 1 (low independence) to 3 

(high independence), was based on supervisory authorities’ answers to a series of questions 

designed to ascertain how insulated the supervisor is from political pressure. Table 4 displays 

how 55 countries ranked according to this index. Forty-four percent of the countries have bank 

supervisory authorities with relatively low independence, while more than one-quarter (27 

percent) have relatively high independence; 29 percent of the countries rank in between. 

Although countries with low supervisory independence are scattered across country income

 

52As Barth, Nolle, Phumiwasana, and Yago (2003) point out, the issue of independence for supervisory authorities 

has also attracted increasing attention among policy makers. In particular, the Basel Committee's 1997 Core 

Principles for Effective Banking Supervision highlights supervisory independence. The Core Principles comprise

25 basic principles that must be in place for a supervisory system to be effective. The principles cover licensing, 

prudential regulations and requirements, methods of supervision, information requirements, formal powers of

supervisory authorities, and cross-border banking. Importantly, the first principle outlines necessary “preconditions 

for effective banking supervision,” and chief among these fundamental preconditions is that agencies responsible for 

banking supervision “should possess operational independence” (Core Principles, p. 4). 

27
groups, only two “High Independence” countries appear in the lower middle income group, and 

none in the low income group. 

The World Bank (2001) also addresses another aspect of independence, namely the 

extent to which supervisors are protected from criminal or civil prosecution for the performance 

of their duties. In effect, supervisees not only can employ the political process to reduce the 

extent to which their activities are subject to official oversight, but they can also use the courts. 

If supervisors enjoy a low level of compensation, which is often associated with a low degree of 

political independence, and simultaneously face the unprotected threat of large civil penalties for 

conducting vigorous supervision, then supervisory oversight can be expected to be weak. 

However research in this area is still in its infancy.

IV.C. Implementation of Supervision 

The debate no doubt will continue on the relative advantages and disadvantages of 

different supervisory system structures. However, as important as that debate is, it is secondary 

to issues surrounding the implementation of supervision. In this regard, we can make a number 

of comparisons on the nature of scope of supervisory practices based upon World Bank data. In 

particular, Table 5 shows comparative information for several aspects of the implementation of 

supervision across 55 countries. 

First, Table 5 presents information on the frequency of on-site bank examinations. We 

have no direct information on the scope of bank examinations across our sample of countries – 

i.e., what aspects of bank operations are examined, and how thoroughly. However, in about half 

of the countries’ bank supervisors perform an on-site examination of most banks annually. On 

the other hand, many countries perform on-site bank examinations less frequently, and some

28
countries, for example the United Kingdom, rely heavily on “off-site” examination of 

information submitted by banks to supervisory authorities. 

Another way to measure the nature of supervisory implementation is to gauge 

supervisory resource utilization. A crude measure is to calculate the average number of 

supervisors on a per-bank basis, as is illustrated in the middle column of Table 5. By this 

measure, while the three lower country income groups are roughly similar, the high income

countries show a much lower supervisors-per-bank ratio. The number of banks in each country 

will influence this measure heavily. The high income countries, with much larger economies on 

average than the lower income countries, tend to have many more banks on average than the 

lower income countries. An alternative measure of supervisory resource use is given in the far 

right-hand column of Table 5. “Banking Assets per Supervisory Staff” gives a rough measure of 

the “coverage” of banking system activity for which each supervisory staff member is 

responsible. Again, although there is wide variation across countries, a basic country income

level pattern stands out. In particular, the “coverage” of banking activities on a per-staff-member 

basis is much higher for the high income countries than for the lower three income groups.53

IV.D. Deposit Insurance 

The inherent fragility of banks has motivated a number of nations to establish deposit 

insurance schemes. Such schemes are intended to assure depositors that their funds are safe by 

having the government guarantee that they can always be withdrawn on demand at full value. 

To the extent that depositors believe that the government is able and willing to keep its promise, 

they will have no incentive to engage in widespread runs to withdraw their funds from banks. 

 

53 Goodhart, Schoenmaker, and Dasgupta (2002) consider an additional dimension of supervisory resources. Using

a database for 91 countries, they examine the impact on bank supervisory posture that the mix of skills has, focusing

in particular on the relative proportions of economists and lawyers. 

29
By increasing depositor confidence, deposit insurance thus has the potential to provide for a 

more stable banking system.

54 

At the same time that deposit insurance increases depositor confidence, it creates a 

potentially serious “moral hazard” problem. When depositors believe that their funds are safe 

they have little, if any, incentive to monitor and police the activities of banks. When this type of 

depositor discipline is removed, banks are freer to engage in riskier activities. To the extent that 

this type of behavior is not kept in check once a country establishes a deposit insurance scheme, 

its banking system may still be susceptible to a crisis. 

Under these circumstances, the establishment of a deposit insurance scheme is not a 

panacea. It provides both potential benefits and costs to a society. The challenge is to maximize 

the benefits while simultaneously minimizing the costs. For this reason, a better appreciation 

and understanding of deposit insurance is needed by governments and citizens in countries 

around the globe, particularly because ever more countries have been establishing such schemes 

in recent years. 55 Indeed, since the first national deposit insurance scheme was established by 

the United States in 1933, nearly 70 more countries have followed suit, most within the past 20 

years. 

There is widespread agreement that appropriate regulation and supervision are 

particularly important for preventing banking problems once countries have established a deposit 

insurance scheme. Those countries must increasingly contain the incentive for banks to engage 

in excessively risky activities once banks have access to deposits insured by the government. 

For, as Hovakimian, Kane and Laeven (2002), p.23) put it: “weaknesses in risk control can 

generate large fiscal and social costs under an explicit insurance regime, a truth that most recent 

 

54 See the seminal paper by Diamond and Dybvig (1983). 

55 In this regard, see the recent and excellent studies by Kane (2000) and Demirgüç-Kunt and Kane (2002). 

30
financial crises underscore.” The difficult task, however, is to replace the reduced discipline of 

the private sector with that of the government. Nonetheless, it has done with varying degrees of 

success in countries around the world. The proper way to do so involves both prudential 

regulations and effective supervisory practices. 

Skilled supervisors and appropriate regulations can help prevent banks from taking on

undue risk, and thereby exposing the insurance fund to excessive loses. At the same time, 

however, banks must not be so tightly regulated and supervised that they are prevented from

adapting to a changing financial marketplace. If this happens, banks will be less able to compete 

and thus more likely to fail. The regulatory and supervisory authorities must therefore strike an 

appropriate balance between being too lenient and too restrictive in order to promote a safe and 

sound banking industry. 

The appropriateness of specific regulations and supervisory practices depends upon the 

specific design features of a deposit insurance scheme. Some features may exacerbate moral 

hazard, whereas others may minimize it. Therefore a government must realize that when 

designing a scheme one must consider the effects of various features on both depositor 

confidence and moral hazard. In this regard, information has recently become available 

describing many of the important differences among deposit insurance schemes that have been 

established in a wide cross-section of countries. It is therefore useful to examine this “menu of 

deposit insurance schemes.” One can thereby appreciate the ways in which these schemes differ 

and then try to assess combinations of features that seem to instill depositor confidence so as to 

eliminate bank runs and yet contain the resulting moral hazard that arises when depositor 

discipline is substantially, if entirely, eliminated.56

 

56 In this regard, see Hovakimian, Kane and Laeven (2002), and Demirgüç-Kunt and Detragiache (2001).

31
Approximately one third of all countries have already established deposit insurance 

schemes. Information on selected design features for the schemes in 55 representative countries 

is presented in Table 6.57 It is quite clear from this information that there are important 

differences in key features across all these countries, which includes both emerging market 

economies and mature economies. Moreover, the vast majority of these countries have only 

recently established deposit insurance for banks. Indeed, 44 percent of the countries have 

established their schemes within the past 20 years, and half of those countries established a 

deposit insurance scheme within the past decade. Even more countries, moreover, are either in 

the process or likely in the near future to establish a deposit insurance scheme. 

One key feature of any deposit insurance scheme is the coverage limit for insured 

depositors. The higher the limit the more protection afforded to individual depositors. But the 

higher the limit, the greater the moral hazard. 58 The limits vary quite widely for countries, 

ranging from a low of $1,096 in Poland to a high of $125,000 in Italy. For purposes of 

comparison, the limit is $100,000 in the U.S. One problem with these comparisons, however, is 

that there are wide differences in the level of per capita income among these countries. It is 

therefore useful to compare the coverage limits after expressing them as a ratio to GDP per 

capita. Doing so one finds that Peru has the highest ratio at 9, whereas most of the other 

countries have a ratio at or close to 1. Clearly, ratios that are high multiples of per capita GDP 

are more likely to reduce the degree of discipline that depositors impose on banks. 

 

57 For recent and comprehensive information, see Demirgüç-Kunt and Sobaci (2001). Also, see Coburn and 

O’Keefe (2003). 

58 The highest “coverage,” and therefore the highest degree of moral hazard, arises under systems without an explicit 

deposit insurance scheme, but where depositors and bankers believe there is “implicit” full coverage for all deposits 

by the government. 

32
In addition to coverage limits, countries also differ in whether coinsurance is a part of the 

deposit insurance scheme. This particular feature, when it is present, means that depositors are 

responsible for a percentage of any losses should a bank fail. Only 16 percent of the countries 

have such a feature. Yet, to the extent that depositors bear a portion of any losses resulting from

a bank failure, they have an incentive to monitor and police banks. Usually, even when countries 

adopt coinsurance, the percentage of losses borne by depositors is capped at 10 percent. Even 

this relatively small percentage, however, may be enough to attract the attention of depositors 

when compared with the return they can expect to earn on their deposits, and thereby help to 

curb moral hazard. 

Some countries have elected to establish an ex-ante funded scheme, whereas others have 

chosen to provide the funds for any losses from bank failures ex-post. Of the 55 countries, only 

13 percent have chosen to establish an ex-post or unfunded scheme. In this case the funds 

necessary to resolve bank failures are obtained only after bank failures occur. This type of

arrangement may provide a greater incentive for private monitoring and policing, because 

everyone will know that the funds necessary to resolve problems have not yet been collected. 

And everyone will also know that a way to keep any funds from being collected is to prevent 

banks from engaging in excessively risky activities. The degree of monitoring depends on the 

source of funding. In this regard, there are three alternative arrangements: public funding, private 

funding, or joint funding. Of these sources, private funding provides the greatest incentive for 

private discipline, and public funding the least. Although the information is not provided in the 

table, only 15 percent of the countries fund their deposit insurance schemes solely on the basis of 

private sources. At the same time, however, only one country relies solely on public funding. 

Seven of the schemes that are privately funded are also privately administered and one is jointly 

33
administered. In none of the 55 countries where there is only private funding is the fund solely 

administered by government officials. 

In addition to those design features, there are two other features that must be decided 

upon when a country establishes a deposit insurance scheme. One is whether premiums paid by 

banks for deposit insurance should be risk-based. The advantage of risk-based premiums is that 

they potentially can be used to induce banks to avoid engaging in excessively risky activities. 

This would give banking authorities an additional tool to contain moral hazard. Yet, in practice it 

is extremely difficult to set and administer such a premium structure. Table 8 shows that slightly 

less than one third of the countries have chosen to adopt risk-based premiums. Most countries 

that have adopted the schemes are careful to refer to them as differential premia systems rather 

than risk-based, and a common critique is that the difference between the lowest premium and 

the highest is quite limited.59

The last feature to be discussed is the membership structure of a deposit insurance 

scheme. A country must decide whether banks may voluntarily join or will be required to join. A 

voluntarily scheme will certainly attract all the weak banks. The healthy banks, in contrast, are 

unlikely to perceive any benefits from membership. If this happens, the funding for resolving 

problems will be questionable for both ex-ante and ex-post schemes. Indeed, the entire scheme

may merely become a government bailout for weak banks. By requiring all banks to become

members, the funding base is broader and more reliable. At the same time, when the healthy 

banks are members, they have a greater incentive to monitor and police the weaker banks to help 

protect the fund. 

 

59 Moreover, in the United States, which does have a differential premium, no premium in fact has been collected for 

a number of years from most banks. Relevant legislation includes a feature that allows the Federal Deposit 

Insurance Corporation to stop all contributions, except from banks in its highest risk category, once a certain funding

ratio has been reached. 

34
Although many countries at all levels of income and in all parts of the world have 

established deposit insurance schemes, they have not chosen a uniform structure. The specific 

design features differ widely among countries as indicated in Table 6. The fact that so many 

countries around the globe have suffered banking crisis over the past 20 years has generated a 

substantial amount of research focusing on the relationship between a banking crisis and deposit 

insurance. Although this type of research is still ongoing, there are currently enough studies from

which to draw some, albeit tentative, conclusions about deposit insurance schemes that help 

promote a safe and sound banking industry.60 They are as follows: 

• Even without a deposit insurance scheme, countries have responded on occasion to 

banking crises with unlimited guarantees to depositors. An appropriately designed 

scheme that includes a coverage limit many be better able to serve notice to depositors as 

to the extent of their protection and thereby enable governments to avoid more costly expost bailouts. 

• The design features of a deposit insurance scheme are quite important. Indeed, recent 

empirical studies show that poorly designed schemes increase the likelihood that a 

country will experience a banking crisis. 

• Properly designed deposit insurance schemes can help mobilize savings in a country and 

foster overall financial development. Research has documented this important linkage but 

emphasizes that it only holds in countries with a strong legal and regulatory environment. 

• Empirical research shows that market discipline is seriously eroded in countries that have 

designed their deposit insurance schemes with a high coverage limit, an ex-ante fund, the 

government being the sole source of funds, and only public officials as the administrators 

of the fund. 

• Empirical research shows that market discipline is enhanced significantly in countries 

that have designed their deposit insurance schemes with coinsurance, mandatory 

membership, and private or joint administration of the fund. 

 

60 See Hovakimian, Kane and Laeven (2002); Kane (2000); Demirgüç-Kunt and Kane (2002); Demirgüç-Kunt and 

Detragiache (2001, 2000, 1998b, and 1998a); Demirgüç-Kunt, Detragiache and Gupta (2000); and Barth, Caprio and 

Levine (2003).

35
IV.E. Corporate Governance in Banking

Although all countries regulate and supervise banks, and many countries have instituted 

deposit insurance systems to promote banking system safety and soundness, a fundamental 

conflict remains between the owners of banks and the managers and directors of banks. The 

“principal-agent” problem as it has come to be known starts from the premise that the goals of 

owners (the principals) may be significantly different from the objectives of managers and 

directors (the agents), who may pursue policies inconsistent with share value-maximization. To 

some extent such conflicts of interest can be addressed by contractual solutions. However, high 

transactions costs prohibit contracts from being written to cover all possible deviations from

value-maximizing behavior. Hence, additional rules and practices – “corporate governance” 

procedures – have been instituted to address gaps in contractual specifications of rights and 

obligations of the various claimants on firm value. 

The issue of corporate governance for banks is particularly important, as Caprio and 

Levine (2002) and Macey and O’Hara (2003) argue. Banks and other financial intermediaries 

themselves exert corporate governance on firms, both as creditors of firms and, in many 

countries, as equity holders. Indeed, as Caprio and Levine (2002) point out, in many countries, 

especially developing ones, where banks dominate as financial intermediaries, banks are among 

the most important sources of governance for firms. To the extent banks are well-managed, the 

allocation of capital will occur efficiently in an economy. However, if there is poor corporate 

governance of banks, “bank managers may actually induce firm managers to behave in ways that 

favor the interests of bank managers but hurt overall firm performance.”61 This in turn can hurt 

the performance of the economy. Indeed, Bushman and Smith (2003) make an explicit 

 

61 Caprio and Levine (2002, p. 18). 

36
connection between corporate governance of financial intermediaries and the finance-andeconomic-growth literature. 

Despite the importance of this issue, “very little attention has been paid to the corporate 

governance of banks.”62 However, in the wake of recent well-publicized governance scandals at 

multinational firms headquartered in the U.S. and elsewhere, there has been a renewed interest in 

research on corporate governance, and this interest seems in part to have stimulated new interest

in research on corporate governance for banking.63 Conceptually, Macey and O’Hara (2003) 

argue that given the special nature of banking, it is worthwhile to consider as “stakeholders” 

constituents beyond shareholders.64 Because banks’ liabilities, especially to depositors, play 

such a crucial role in the economy, Macey and O’Hara argue that “bank directors should owe 

fiduciary duties to fixed claimants as well as to equity claimants.”65 In a complementary vein, 

Caprio and Levine (2002) explain that there are four sources of governance for banks: “equity 

holders, debt holders, the competitive discipline of output markets, and governments.”66 Each of 

these constituents therefore has an interest in effective corporate governance for banks. 

Empirically, Adams and Mehran (2003) have identified important differences between 

banking holding companies (BHCs) and nonfinancial firms in key characteristics of 

 

62 Macey and O’Hara (2003, p. 91). See also Caprio and Levine (2002, p. 18) , and Adams and Mehran (2003, p. 

123). 

63 See Shleifer and Vishny (1997) for a comprehensive and thoughtful survey of research on corporate governance. 

Macey and O’Hara (2003) discuss the emerging literature on corporate governance for banks. 

64 See Corrigan (1982) on why banks are considered “special.” Kwan (2001) provides a concise essay on this topic. 

65 Macey and O’Hara (2003, p. 102). Adams and Mehran (2003, p. 124) add at least one more constituent. They 

argue that “the number of parties with a stake in [a financial] institution’s activity complicates the governance of

financial institutions. In addition to investors, depositors and regulators have a direct interest in bank performance.” 

66 Caprio and Levine (2002, p. 19). 

37
governance.67 These differences extend to the size and composition of boards of directors, the 

structure and activities of boards, chief executives’ compensation and direct equity holdings, and 

dispersion of ownership of company shares. 

An important dimension of corporate governance is the degree of transparency that exists 

for the operations of a firm. The more comprehensive and accurate is information about how 

managers conduct the firm’s business, the more effective can stakeholders be in monitoring 

managers’ performance. Extending recent work by Caprio and Levine (2002), Table 7 presents 

cross-country information on bank operations transparency: (1) the effectiveness of external 

audits of banks; (2) the transparency of bank accounting practices; and (3) the evaluations by 

external rating agencies and incentives for creditors of the bank to monitor bank performance. 

An index summarizing country-specific component data on each of these three dimensions of 

corporate governance in banking is calculated, with higher values indicating better corporate 

governance measures.68 In addition, the far right-hand column aggregates these indexes into a 

“Corporate Governance Index.” As in the case of other cross-country information presented 

 

67 As they explain, because public information on governance procedures is generally available only for publicly

traded bank holding companies, the holding companies are examined instead of banks. Adams and Mehran also 

discuss the relatively small number of other recent empirical studies of corporate governance in banking. 

68 Details of the calculations of the indexes are: The Strength of External Audit index adds one for an affirmative 

answer to each of the following questions: 1) Is an external audit required?; 2) Are auditors licensed or certified?; 3) 

Do supervisors receive a copy of the auditor’s report?; 4) Can supervisors meet with auditors without prior approval 

by the bank?; 5) Are auditors legally required to report bank misconduct to supervisors?; 6) Can supervisors take 

legal action against external auditors? The Bank Accounting Transparency index adds one for an affirmative answer

to each of the following questions: 1) Are financial institutions required to produce consolidated accounts covering 

all bank and any nonbank financial subsidiaries?; 2) Are off-balance sheet items disclosed to the public?; 3) Must

banks disclose their risk management procedures to the public?; 4) Are bank directors legally liable if information 

disclosed is erroneous or misleading? In addition, this index adds one for a negative response to the following

question: Does accrued, though unpaid interest or principal enter the income statement while a loan is still 

nonperforming? The External Ratings and Creditor Monitoring index adds one for an affirmative answer to the

following question: Is subordinated debt allowable or required as a part of capital? The index also adds one if the 

top 10 banks in the country are rated by an international credit rating agency. The Corporate Governance Index is 

the sum of these component indexes.

38
throughout this chapter, the 55 countries compared in Table 7 show a relatively wide range of 

differences across corporate governance characteristics. 

Looking at averages for the four country income groups, there is a positive relationship 

between the composite Corporate Governance Index and country income level. In particular, the 

overall (lower) Corporate Governance Index is statistically significantly lower for the lower 

income countries as compared with the highest two income groups.69 With little variation in 

reported external audit practices, this pattern is due in part to significant differences across the 

country income groups in the index of bank accounting practices transparency. The index 

calculated to capture the degree to which external ratings agencies provide information about 

bank operations and performance, plus whether subordinated debt is counted as part of bank 

capital – with an affirmative answer increasing the likelihood that bank bond holders have a 

strong incentive to monitor bank performance – also accounts for part of the overall statistical 

significance of the positive relationship between country income level and good corporate 

governance procedures.70

V. Banking Crises 

V.A. Incidence of Banking Crises 

Banking crises have occurred in various countries and at various time periods throughout 

history. An unprecedented number, however, occurred during the last two decades of the 

twentieth century. More specifically, Caprio and Klingebiel (2003) have identified 117 episodes 

of systemic banking crises that occurred in 93 countries and 51 episodes of borderline crises that 

 

69 Statistical significance measures are not shown in Table 7. A difference of means tests shows that the Corporate 

Governance Index is statistically significantly different at the 99 percent confidence level for the low income group

relative to the high income group, and at the 95 percent confidence level for the low income group relative to the 

Upper Middle Income group. 

70 Difference of means test results across each index are available from the authors upon request. 

39
occurred in 45 countries during this time period. This means that more than half of the 

approximately 220 countries in the world experienced full-blown or borderline banking crises in 

the relatively short span of 20 years. As Figure 2 show, these crises occurred, moreover, in 

countries at all levels of economic development and in all parts of the globe.71

The worst aspect of banking crises is that they can be quite costly to resolve and 

disruptive to economic activity. Indeed, as Figure 3 indicates, the direct cost of resolving 

insolvent banks can be extremely high. The banking crises in Southeast Asia that began in the 

summer of 1997, for example, imposed costs of 27 percent of GDP in the case of South Korea, a 

still higher 33 percent in the case of Thailand, and an enormous 50 percent in the case of 

Indonesia. Such huge costs create enormous budgetary problems and lead to the diversion of 

scarce resources from more productive uses. This results in slower economic growth and 

development than would otherwise occur. High costs to resolve banking crises may even 

contribute to social unrest and the overthrow of governments, as occurred in Indonesia following 

its financial crisis in 1997. 

V.B. Causes and Prevention 

Banks are by their nature fragile firms. The reason is that they specialize in providing 

short-term liquidity services while simultaneously providing longer-term credit services. This 

maturity imbalance subjects them to potential troubles in the event that shifts in one side of the 

balance sheet will not be compensated by shifts in the other side. Banks are actively involved in 

determining what happens to their balance sheets. At times, they may deliberately attract more 

deposits by offering higher rates than their competitors and then extend credit for excessively 

risky projects promising still higher rates of return. The incentive to engage in such behavior is 

 

71 For recent and comprehensive survey on banking crises and, more generally, systemic risk, see De Bandt and 

Hartman (2000). 

40
that limited liability exposes the owners of banks to the loss of only their contributed equity 

capital. When the amount of such capital is relatively low and when owner liability is limited to 

this capital, banks have an incentive to engage in excessively risky activities strategies, because 

the upside gain could be quite large compared with the smaller downside loss. This situation is 

exacerbated in the presence of generous deposit insurance schemes, because depositors have no 

incentive to constrain or to monitor the bank’s use of their funds. Instead, this role becomes the 

responsibility of bank regulators and supervisors. They must impose discipline on banks, so that 

banks do not engage in imprudent behavior. This can be done through regulations limiting 

specific activities deemed to be too risky and various supervisory practices that identify and 

correct management or operational weaknesses. When the regulatory and supervisory authorities 

do not fulfill their responsibilities, the results can be disastrous.72 

Some argue that the regulatory and supervisory authorities in many of the countries that 

experienced banking crises during the past 20 years did not take appropriate and timely action. 

Some of the international lenders to banks and firms in specific countries, for example, may have 

believed that the International Monetary Fund (IMF) would come to the rescue of those countries 

if there were a banking or other financial crisis. More funds than otherwise therefore flowed into 

those countries considered likely candidates to receive IMF support were a crisis to occur. 

Regulatory and supervisory authorities must take into account the fact that the IMF does indeed 

provide funds to countries experiencing crises, just as they should when a bank belongs to a 

deposit insurance system. Market discipline is severely weakened in such cases, if not entirely 

 

72 In this regard, Hovakimian, Kane and Laeven (2002, p.23) find that “...recent adopters of insurance have done a 

particularly poor job of replacing the depositor discipline that explicit insurance displaced.” 

41
eliminated. Although regulatory and supervisory discipline becomes extremely important in 

those situations to prevent imprudent bank behavior, it has not always been imposed.73

Another factor that contributes to banking crises is that some states either own banks or 

direct banks to provide credit to various government-owned or government-sponsored 

investment projects. This was the situation in some countries in Southeast Asia that experienced 

banking crises in 1997. In Indonesia a large percentage of banking system assets were controlled 

by state-owned banks. In South Korea the government simply directed that banks extend credit 

to fund specific projects. Such government intervention clearly reduces, if not eliminates, 

market discipline. This, in turn, typically leads to the inefficient allocation of resources. At the 

same time, such intervention can cause both domestic and foreign market participants to 

conclude that the government will never let banks fail. This can cause more funds to flow into 

banks than would otherwise occur, even when the funds are being used for excessively risky 

purposes. This is particularly troublesome, because in the presence of such government 

intervention it is unclear how the bank regulatory and supervisory authorities can promote ‘safe 

and sound’ banking practices, unless they are truly independent from the government.74

It is also possible for adverse shocks to contribute to banking crises. A foreign-exchange 

rate movement, for example, that is unforeseen and large could significantly and adversely affect 

economic growth, especially in small, open economies. This shock could limit the ability of 

firms to repay bank loans. Banks could then become insolvent if the ability of firms to repay 

loans deteriorates enough. Even the collateral backing such loans may turn out to be insufficient 

 

73 For an assessment of the IMF, see Meltzer (1999). 

74 See, for example, Barth, Caprio and Levine (2003); Barth, Brumbaugh, Ramesh and Yago (1998); La Porta,

Lopez-de-Silanes and Shleifer (2002); and Corsetti, Pesenti and Roubini (1998). 

42
to prevent bank insolvencies as it decreases in value along with the general slowdown in 

economic growth resulting from the adverse shock. 

Banking crises are obviously caused by a variety of factors. Bank runs, adverse shocks, 

and moral hazard can all contribute to banking crises – not to overlook bad luck, 

mismanagement, and downright fraud. No matter what causes crises, governments can take 

actions that precipitate as well as exacerbate them. Financial liberalization, for example, in an 

environment in which banks are inadequately capitalized and bank regulation and supervision are 

weak is a recipe for disaster. Also, allowing inadequately capitalized banks to grow rapidly is 

unwise. As banks grow rapidly, for instance, they may make real estate loans and accept real 

estate as collateral for the same loans. This can contribute to a real estate bubble that creates a 

banking crisis when it bursts. Indeed, the most frequently found common denominator in studies 

of banking crises around the world throughout history is imprudent and speculative real estate 

lending. Banking crises can therefore occur more frequently and be more costly when 

governments fail to impose the discipline on banks that private market participants would 

impose. In this sense, bank regulation and supervision matter for stability in the banking sector. 

In recent years there has been a rapidly growing number of studies of banking crises.75

This interest has been fueled by the large number of costly banking crises in recent years. But it 

is also fueled by the increasing availability of data necessary to analyze these crises. Based upon 

this data, studies have been conducted by academics and by researchers at both central banks and 

multinational agencies. Much more research must be conducted to understand more fully the 

 

75 See, for example, Aggarwal (1999); Boyd, Gomis, Kwak and Smith (2001); Caprio and Klingebiel (1996 and 

1999); Demirgüç-Kunt and Detragiache (1998a, 1998b and 2000); Eichengreen and Arteta (2000); Frydl (1999); 

Gourinchas, Valdes and Lenderretche (2001); Hardy and Pazarbşioğlu (1999); Hutchison and Neuberger (2002); 

Kaminsky and Reinhart (1999); Lindgren, Garcia and Saal (1996); Kho and Stultz (2000); McKinnon and Pill 

(1998); Rojas-Suarez and Weisbrod (1996); and Barth, Caudill, Hall and Yago (2000). 

43
nature of banking crises. Despite this situation and the fact that banking crises can never be 

completely preventable, there are several actions that countries can take to lessen the likelihood 

of their occurrence and to reduce their costs should they occur.76 

First and foremost, all available evidence indicates that high inflation and sluggish real 

economic growth significantly increase the likelihood of a banking crisis. High real interest rates 

have also been found to be associated with systemic banking sector problems. This means that 

countries must pursue macroeconomic policies that prevent an environment of high real interest 

rates, high inflation, and recessions, and thereby lessen the likelihood of a costly banking crisis. 

Second, banks always have an incentive to engage in excessively risky activities because 

they are highly leveraged firms operating with limited liability. This situation is exacerbated 

when banks also operate with access to a generous deposit insurance scheme. To control the 

risk-taking proclivity of banks, bank regulatory and supervisory authorities must be sure that 

banks operate in a safe and sound manner. This is not an easy task. Banks must not be regulated 

so tightly that they are unable to adapt to a changing financial marketplace. This would only 

weaken them and provide a greater incentive to engage in excessively risky activities in an 

attempt to improve profitability. At the same time, banks must not be so loosely regulated that 

they are able to use risk-free deposits to fund all types of activities with little regard to the 

associated downside losses. This balancing act has resulted in banks being regulated and 

supervised differently across countries with varying degrees of success. 

The important point is not so much the length of the checklist of regulations and 

supervisory practices, but rather how to keep in check the incentive to engage in excessively 

risky behavior. Providing appropriate incentives to banks should be the ultimate goal of bank 

regulation and supervision. In addition, market participants must have both the information and 

 

76 See, for example, Bisignano, Hunter, and Kaufman (2000), Borio (2003) and Kaufman (2000).

44
the incentives to monitor banks. A key way to accomplish this goal is by requiring that banks be 

adequately capitalized based upon their overall riskiness. When the owners of banks have 

sufficient equity capital at risk, they have greater incentive to engage in prudent behavior. One 

must be careful because there may be a point beyond which higher capital requirements will be 

self-defeating, in that expected future profits when discounted to the present do not justify still 

greater amounts of owner-contributed equity capital. Yet, the more typical case over the past 20 

years has been one in which banks in various countries have faced capital requirements set too 

low based upon the overall riskiness of their activities. 

Apart from setting appropriate capital requirements, the banking authorities must be sure 

that the owners, market participants, and supervisors, all are motivated to ensure prudent 

banking. When stated values of capital are eroded, excessive risk-taking can occur, because 

owners have less of their own wealth at risk; similarly if insider managers are allowed to pay 

themselves at extraordinarily high levels, they have a strong incentive to dilute the bank. Both 

markets and supervisors can help control these risks. Markets do so by reducing funding and 

making it more costly. This not only directly affects banks, and forces them to curtail their 

activities, but it also sends a clear signal to supervisors, who then will know which banks to 

scrutinize more closely. 

As capital is depleted, banks must not be allowed to continue in operation as usual. 

Increasingly more stringent enforcement actions should be taken as capital continues to be 

depleted so as to protect the depositors or the deposit insurer from excessive losses. Once the 

capital is completely depleted, the bank should be seized and any claims of existing owners 

extinguished. The United States, among other countries, implemented this type of procedure to 

deal with troubled banks beginning in 1991. This ‘prompt corrective action’ procedure is 

45
supported by empirical evidence showing that by allowing banks to remain in operation under 

the same management and ownership once capital has been depleted typically leads to higher 

resolution costs when the bank is eventually closed than would otherwise be the case.77

Third, available evidence indicates that the government ownership of banks leads to a 

less efficient and more fragile banking system that one based upon private ownership. Evidence 

also exists indicating that countries that allow greater foreign bank participation in their domestic 

banking systems benefit from the healthy competition and spreading of better management 

practices that it engenders. This suggests that the privatization of banks and allowing foreign 

bank ownership of domestic banks should be prudently encouraged to lessen the likelihood of 

costly banking crisis. 

Lastly, the rule of law, effective corporate governance mechanisms and accurate 

accounting systems, and the enforcement of property rights are fundamental for more stable 

banking systems. These factors are closely linked to the ability of the marketplace to impose 

discipline on firms. It is through such discipline that funds are efficiently allocated from savers 

to investors, and that investors use the funds as intended. 

VI. Summary and Conclusion 

A basic premise underlying our review of significant characteristics of international 

banking is that the increasing globalization of banking and finance mandate a broad, crosscountry perspective on banking issues. Indeed, cross-country comparisons can add insight into 

basic issues in banking that may not emerge, or are only partially discernible, from single-

 

77 See Aggarwal and Jacques (1998), for example, for an empirical analysis of the efficacy of prompt corrective 

action requirements in the U.S. Still, the institutional prerequisites to make prompt corrective action effective are 

significant. For example in some developing countries, reflecting both informational and legal shortcomings, it is 

still difficult to close banks long after they are insolvent, much less than before they have reached that stage. 

46
country analyses. With this in mind, we focused on representative analyses of four fundamental 

aspects of international banking: the structure of banking, with emphasis on the connection 

between the development of the banking system and economic growth; banking industry 

performance; banking regulation, supervision, and corporate governance; and banking crises. 

We augmented each of these discussions with an examination of the cross-country “landscape” 

of key dimensions of banking. 

One connecting thread between the characteristics we highlighted is the relationship 

between a strong and stable banking system and economic development. The finance-andgrowth analyses we reviewed deal directly with this theme. In addition, the banking industry 

performance analyses, and the regulation and supervision of banking research, highlight essential 

dimensions of this relationship. Finally, our review of the state of understanding of banking 

crises draws upon, and to an extent synthesizes, these various strands of international banking 

research. 

Research questions remain open of course, in part because only recently have large crosscountry databases been developed. In other cases, for example electronic banking, new 

dimensions of banking are only beginning to emerge and therefore have not been investigated 

widely. In such cases in particular, the existing body of cross-country research on banking and 

finance may offer useful models for future work.

47
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Table 1. Structure of Banking Systems Around the World

Country 

Bank

Assets/GDP 

(%)

Rank

% of Bank

Assets 

GovernmentOwned 

Rank

% of Bank

Assets 

ForeignOwned 

Rank

% of Bank

Assets in 

Top 3 Banks 

Rank

Net Interest

Margin as %

of Total 

Assets 

Rank

High Income

Australia 145.27 19 0.00 39 17.10 27 62.95 14 2.41 24 

Belgium 315.12 6 0.00 40 24.10 23 57.39 21 1.15 7 

Canada 153.84 14 0.00 42 6.10 41 55.32 23 1.76 15 

Cyprus 76.27 33 3.30 35 10.90 34 78.00 7 1.60 12 

Denmark 121.41 22 0.00 43 3.70 51 73.56 8 1.86 16 

Finland 75.25 34 21.90 18 7.80 38 97.17 1 1.56 11 

France 146.80 17 8.70 28 11.60 32 42.43 37 1.08 6 

Germany 313.29 7 42.00 9 4.20 49 17.66 52 1.19 8 

Greece 100.21 25 13.00 24 5.00 44 59.20 16 2.48 27 

Israel 146.67 18 45.60 5 10.70 35 72.10 10 2.18 19 

Italy 150.46 16 17.00 22 5.00 45 37.10 42 1.93 17 

Japan 164.13 12 1.15 38 5.90 42 22.66 49 1.32 10 

Korea 97.70 26 29.70 15 0.00 54 39.20 41 2.10 18 

Luxembourg 3,423.18 1 5.03 33 94.97 3 17.06 54 0.36 3 

Netherlands 357.60 5 5.90 32 3.80 50 79.00 6 1.60 13 

New Zealand 153.82 15 0.00 48 99.00 1 58.99 17 2.42 25 

Portugal 238.29 9 20.80 19 11.70 31 34.20 45 1.60 14 

Singapore 801.86 2 0.00 50 50.00 8 17.20 53 

Slovenia 66.13 37 39.60 10 4.60 48 51.41 27 4.04 40 

Spain 155.75 13 0.00 52 11.00 33 43.99 35 2.23 22 

Sweden 128.91 20 0.00 53 1.80 52 68.99 12 1.30 9 

Switzerland 538.90 3 15.00 23 8.50 36 67.06 13 0.85 5 

United Kingdom 311.08 8 0.00 54 52.60 7 16.20 55 2.20 21 

United States 65.85 38 0.00 55 4.70 47 21.48 50 3.35 36 

Average 343.66 11.20 18.95 49.60 1.85 

Upper Middle Income

Argentina 54.24 45 30.00 14 49.00 9 29.80 46 4.90 43 

Botswana 28.92 50 2.39 37 97.61 2 91.80 3 5.20 44 

Brazil 55.17 43 51.50 4 16.70 28 44.70 33 5.30 45 

Chile 96.58 27 11.70 26 32.00 18 41.24 39 3.82 37 

Czech Republic 124.90 21 19.00 21 26.00 21 46.26 32 2.65 28 

Estonia 59.33 41 0.00 44 85.00 4 92.40 2 3.90 38 

Lithuania 26.88 52 44.00 7 48.00 10 72.90 9 0.13 2 

Malaysia 166.07 11 0.00 46 18.00 26 41.26 38 2.20 20 

Mauritius 96.15 28 0.00 47 25.80 22 80.70 5 3.17 34 

Mexico 30.48 49 25.00 16 19.90 24 49.52 28 5.55 46 

Panama 385.68 4 11.56 27 38.33 14 28.30 47 2.30 23 

Poland 54.45 44 43.70 8 26.40 20 39.70 40 4.04 39 

Saudi Arabia 92.81 29 0.00 49 0.00 55 58.00 19 2.90 31 

Venezuela 6.03 55 4.87 34 33.72 16 44.27 34 13.20 53 

Average 91.26 17.41 36.89 54.35 4.23 

Lower Middle Income

Bolivia 65.61 39 0.00 41 42.30 12 49.00 30 5.60 47 

El Salvador 62.39 40 7.00 31 12.50 30 58.20 18 4.89 42 

Guatemala 27.65 51 7.61 29 4.93 46 25.67 48 6.12 48 

Jamaica 74.34 35 56.00 3 44.00 11 89.90 4 6.90 51 

60
Table 1. Structure of Banking Systems Around the World

Country 

Bank

Assets/GDP 

(%)

Rank

% of Bank

Assets 

GovernmentOwned 

Rank

% of Bank

Assets 

ForeignOwned 

Rank

% of Bank

Assets in 

Top 3 Banks 

Rank

Net Interest

Margin as %

of Total 

Assets 

Rank

Jordan 213.92 10 0.00 45 68.00 5 52.70 26 2.90 30 

Morocco 88.74 32 23.90 17 18.78 25 48.12 31 3.33 35 

Peru 36.35 47 2.50 36 40.40 13 59.90 15 4.80 41 

Philippines 90.78 30 12.12 25 12.79 29 19.36 51 3.08 33 

Romania 25.49 53 70.00 2 8.00 37 57.58 20 6.71 50 

South Africa 89.78 31 0.00 51 5.20 43 57.34 22 2.93 32 

Thailand 116.85 23 30.67 12 7.16 39 53.56 24 0.54 4 

Turkey 67.35 36 35.00 11 66.30 6 35.06 43 6.51 49 

Average 79.94 20.40 27.53 50.53 4.53 

Lower Income

India 47.55 46 80.00 1 0.00 53 34.60 44 2.78 29 

Indonesia 100.79 24 44.00 6 7.00 40 52.80 25 -3.84 1 

Kenya 56.06 42 30.60 13 29.40 19 43.40 36 7.50 52 

Moldova 25.29 54 7.05 30 33.37 17 49.30 29 17.91 54 

Nepal 32.02 48 20.00 20 35.00 15 69.21 11 2.44 26 

Average 52.34 36.33 20.95 49.86 5.36 

Source: Office of the Comptroller of the Currency and World Bank using information from national supervisory authorities. 

Note: The income groups are based on the World Bank country classification of economies as of April 2003. The economies are grouped 

according to 2001 gross national income (GNI) per capita. The groups are defined as: low income, $745 or less; lower middle income,$746–

2,975; upper middle income, $2,976–9,205; and high income, $9,206 or more.

61
Table 2. Performance of Banking Systems Around the World

Country 

Return on 

Assets 

(ROA) 

(%)

Overall 

Rank

Return on 

Equity 

(ROE) 

(%)

Overall 

Rank

Noninterest 

Revenue / Total

Revenue (%) 

Overall 

Rank

Nonperforming 

Loans as % of 

Total Loans 

Overall 

Rank

High Income

Australia 0.98 22 14.61 22 40.69 16 1.25 7

Belgium 0.38 43 12.68 28 43.78 12 1.64 11

Canada 0.68 34 16.16 15 52.36 8 1.10 6

Cyprus 1.60 7 22.00 7 54.00 7 8.38 32

Denmark 0.91 24 15.30 20 38.99 19 0.86 3

Finland 0.85 25 16.18 14 19.94 34 0.87 4

France 0.35 45 6.13 44 85.48 2 5.95 23

Germany 0.33 47 11.16 32 N/A N/A

Greece 2.92 2 35.23 3 24.49 30 14.70 45

Israel 0.66 36 11.30 31 34.80 23 2.69 15

Italy 0.65 38 9.37 36 44.51 11 6.90 27

Japan 0.62 39 12.97 27 38.00 21 6.40 24

Korea 1.42 10 23.13 5 27.50 28 13.60 41

Luxembourg 0.36 44 11.64 29 48.75 10 0.48 2

Netherlands 0.56 40 14.30 23 42.50 13 N/A

New Zealand 1.10 18 22.47 6 36.07 22 0.44 1 

Portugal 0.70 32 10.30 34 54.30 5 2.20 13

Singapore 1.20 16 10.50 33 N/A 9.10 33

Slovenia 0.79 26 7.76 42 4.04 49 5.60 22

Spain 0.76 27 13.44 25 26.63 29 1.54 9

Sweden 0.66 37 18.77 8 54.12 6 1.44 8

Switzerland 0.75 28 17.91 9 40.31 17 4.62 20

United Kingdom 1.40 12 29.60 4 40.10 18 1.60 10

United States 1.31 14 15.32 19 28.23 26 0.95 5 

Average 0.91 15.76 39.98 4.20 

Upper Middle Income

Argentina 0.30 48 1.80 48 30.70 25 8.10 31

Botswana 2.85 3 43.88 2 20.60 33 3.80 18

Brazil 1.60 6 17.50 12 0.00 51 9.10 34

Chile 0.73 30 9.37 35 41.62 15 1.67 12

Czech Republic -0.24 53 -5.24 52 2.76 50 32.09 49

Estonia 1.50 9 9.20 37 33.90 24 2.70 16

Lithuania 0.13 50 1.32 49 27.90 27 12.47 39

Malaysia 1.36 13 17.75 10 14.97 39 10.44 36

Mauritius 2.24 4 17.58 11 15.87 37 7.97 30

Mexico 0.68 35 6.54 43 19.48 35 10.20 35

Panama 1.40 11 15.90 16 12.90 41 2.40 14

Poland 0.99 21 13.48 24 N/A 13.70 42

Saudi Arabia 1.50 8 15.40 18 11.80 44 10.50 38 

Venezuela 1.92 5 15.89 17 N/A 7.13 29

Average 1.21 12.88 19.37 9.45 

Lower Middle Income

Bolivia 0.70 31 7.90 41 42.00 14 6.60 25

El Salvador 0.33 46 2.53 47 12.35 43 2.91 17

Guatemala 1.16 17 11.57 30 89.75 1 10.45 37

Jamaica 1.20 15 13.00 26 10.40 45 14.00 43

62
Table 2. Performance of Banking Systems Around the World

Country 

Return on 

Assets 

(ROA) 

(%)

Overall 

Rank

Return on 

Equity 

(ROE) 

(%)

Overall 

Rank

Noninterest 

Revenue / Total

Revenue (%) 

Overall 

Rank

Nonperforming 

Loans as % of 

Total Loans 

Overall 

Rank

Jordan 0.97 23 7.90 40 10.40 46 14.00 44

Morocco 0.69 33 8.18 39 8.73 48 6.70 26

Peru 0.30 49 3.80 45 23.80 31 7.00 28

Philippines 0.47 42 3.74 46 17.12 36 13.01 40

Romania 0.00 52 0.00 51 49.82 9 35.39 52

South Africa 1.04 20 16.22 13 55.55 4 4.00 19 

Thailand -5.30 54 -88.62 54 13.82 40 38.52 53

Turkey 0.74 29 -14.54 53 8.78 47 4.69 21

Average 0.19 -2.36 28.54 13.11 

Low Income

India 0.47 41 9.17 38 12.72 42 14.70 46

Indonesia -6.10 55 -110.80 55 68.10 3 32.90 50

Kenya 0.00 51 0.30 50 22.50 32 34.20 51

Moldova 4.42 1 15.29 21 38.50 20 21.90 47

Nepal 1.06 19 61.32 1 15.40 38 23.94 48

Average -0.03 -4.94 31.44 25.53 

Source: Office of the Comptroller of the Currency using information from national supervisory authorities. 

Notes: Countries are ranked from highest to lowest, except for nonperforming loans where countries are ranked from lowest to highest.

63
Table 3. Permissible Banking Activities and Ownership Around the World 

(Countries Ranked from Least to Most Restrictive)

Country Securities Activities Insurance Activities Real Estate Activities 

Index of Activities 

Restrictiveness 

(A higher number

indicates greater

restrictiveness) 

Bank Ownership 

of Nonfinancial 

Firms 

Nonfinancial 

Firm Ownership 

of Banks 

High IncomeAustralia Unrestricted Permitted Restricted 6 Permitted Restricted Belgium Permitted Permitted Restricted 7 Permitted Permitted Canada Unrestricted Permitted Unrestricted 4 Restricted Restricted Cyprus Permitted Permitted Unrestricted 5 Restricted Restricted Denmark Unrestricted Permitted Permitted 5 Restricted Permitted Finland Unrestricted Restricted Unrestricted 5 Permitted Unrestricted France Unrestricted Permitted Unrestricted 4 Permitted Unrestricted Germany Unrestricted Unrestricted Unrestricted 3 Permitted Unrestricted Greece Permitted Restricted Permitted 7 Permitted Permitted Israel Permitted Prohibited Prohibited 10 Restricted Permitted Italy Unrestricted Permitted Prohibited 7 Restricted Restricted Japan Restricted Prohibited Restricted 10 Restricted Restricted Korea Permitted Permitted Permitted 6 Restricted Restricted Luxembourg Unrestricted Permitted Unrestricted 4 Permitted Restricted Netherlands Unrestricted Permitted Unrestricted 4 Permitted Unrestricted New Zealand Unrestricted Unrestricted Unrestricted 3 Unrestricted Unrestricted Portugal Unrestricted Permitted Restricted 6 Restricted Unrestricted Singapore Unrestricted Permitted Restricted 6 Permitted Permitted Slovenia Permitted Permitted Permitted 6 Restricted Permitted Spain Unrestricted Permitted Restricted 6 Unrestricted Permitted Sweden Unrestricted Permitted Restricted 6 Restricted Unrestricted Switzerland Unrestricted Unrestricted Unrestricted 3 Permitted Unrestricted United Kingdom Unrestricted Permitted Unrestricted 4 Unrestricted Unrestricted United States* Restricted Restricted Restricted 9 Restricted Restricted Average 6 Upper Middle IncomeArgentina Permitted Permitted Permitted 6 Unrestricted Unrestricted Botswana Unrestricted Restricted Prohibited 8 Permitted Unrestricted Brazil Permitted Permitted Restricted 7 Restricted Unrestricted Chile Permitted Permitted Prohibited 8 Restricted Restricted Czech Republic Unrestricted Permitted Permitted 5 Restricted Permitted Estonia Permitted Permitted Permitted 6 Permitted Permitted 

64
Table 3. Permissible Banking Activities and Ownership Around the World 

(Countries Ranked from Least to Most Restrictive)

Country Securities Activities Insurance Activities Real Estate Activities 

Index of Activities 

Restrictiveness 

(A higher number

indicates greater

restrictiveness) 

Bank Ownership 

of Nonfinancial 

Firms 

Nonfinancial 

Firm Ownership 

of Banks 

Lithuania Permitted Permitted Restricted 7 Permitted Permitted Malaysia Permitted Permitted Restricted 7 Restricted Restricted Mauritius Restricted Prohibited Prohibited 11 Permitted Restricted Mexico Restricted Prohibited Restricted 10 Permitted Permitted Panama Unrestricted Permitted Restricted 6 Permitted Unrestricted Poland Permitted Restricted Restricted 8 Permitted Unrestricted Saudi Arabia Permitted Permitted Prohibited 8 Restricted Unrestricted Venezuela Permitted Permitted Restricted 7 Restricted Restricted Average 7 Lower Middle IncomeBolivia Permitted Permitted Prohibited 8 Prohibited Unrestricted El Salvador Permitted Restricted Prohibited 9 Prohibited Restricted Guatemala Restricted Restricted Prohibited 10 Restricted Restricted Jamaica Restricted Restricted Restricted 9 Restricted Unrestricted Jordan Unrestricted Prohibited Restricted 8 Restricted Unrestricted Morocco Permitted Prohibited Prohibited 10 Restricted Unrestricted Peru Permitted Permitted Permitted 6 Permitted Permitted Philippines Unrestricted Permitted Permitted 5 Permitted Restricted Romania Permitted Prohibited Prohibited 10 Restricted Unrestricted South Africa Permitted Permitted Restricted 7 Unrestricted Permitted Thailand Permitted Permitted Permitted 6 Restricted Restricted Turkey Restricted Permitted Prohibited 9 Restricted Unrestricted Average 8 Low Income India Unrestricted Prohibited Prohibited 9 Unrestricted Restricted Indonesia Permitted Prohibited Prohibited 10 Prohibited Unrestricted Kenya Permitted Prohibited Restricted 9 Unrestricted Permitted Moldova Unrestricted Permitted Permitted 5 Permitted Permitted Nepal Unrestricted Prohibited Permitted 7 Unrestricted Restricted Average 8 

Source: The World Bank.Notes: * Data for U.S. is pre- Gramm-Leach-Bliley Act (GLBA). 

65
Securities: the ability of banks to engage in the business of securities underwriting, brokering, dealing, and all aspects of the mutual funds industry.

Insurance: the ability of banks to engage in insurance underwriting and selling. 

Real Estate: the ability of banks to engage in real estate investment, development, and management. 

Activities

Unrestricted = a full range of activities can be conducted in the bank. Takes an index value of 1. Permitted = a full range of activities can be conducted, but some or all must be conducted in subsidiaries. Takes an index value of 2. 

Restricted = less than a full range of activities can be conducted in the bank or subsidiaries. Takes an index value of 3. 

Prohibited = the activity cannot be conducted in either the bank or subsidiaries. Takes an index value of 4.

Mixing banking and commerce, Bank Ownership of Nonfinancial Firms

Unrestricted = A bank may own 100 percent of the equity in any nonfinancial firm. Permitted = A bank may own 100 percent of the equity in a nonfinancial firm, but ownership is limited based on a bank's equity capital.Restricted = A bank can only acquire less than 100 percent of the equity in a nonfinancial firm. Prohibited = A bank may not acquire any equity investment in a nonfinancial firm. 

Mixing banking and commerce, Nonfinancial Firm Ownership of Banks

Unrestricted = A Nonfinancial firm may own 100 percent of the equity in a bank.Permitted = Unrestricted, but need prior authorization or approval.Restricted = Limits are placed on ownership, such as a maximum percentage of a bank's capital or shares.

Prohibited = No equity investment in a bank is allowed.

66
Table 4. The Structure, Scope, and Independence of Bank Supervision Around the World 

Country Bank Supervisory Authority 

Single Supervisor

or Multiple 

Supervisors 

Role of Central 

Bank1

Sco

Supe

Auth

High IncomeAustralia 

Australian Prudential Regulation Authority (prudential supervision),Australian Securities and Investments Commission (conduct of business supervision)

Multiple NCB B

Belgium Banking and Finance Commission Single NCB BCanada Office of the Superintendent of Financial Institutions Single NCB BCyprus Central Bank of Cyprus Single CB BDenmark Danish Financial Supervisory Authority Single NCB BFinland Financial Supervision Authority Single NCB BFrance Commission Bancaire Single NCB BGermany Federal Banking Supervision Office, Deutsche Bundesbank Multiple CB Greece Bank of Greece Single CB Israel Bank of Israel Single CB Italy Bank of Italy Single CB Japan Financial Supervisory Agency Single NCB BKorea Financial Supervisory Commission, Ministry of Finance and Economy Multiple NCB BLuxembourg Commission de Surveillance du Secteur Financier Single NCB BNetherlands Bank of Netherlands Single CB New Zealand Reserve Bank of New Zealand Single CB Portugal Bank of Portugal Single CB Singapore Monetary Authority of Singapore Single CB BSlovenia Bank of Slovenia Single CB Spain Bank of Spain Single CB Sweden Sweden Financial Supervisory Authority Single NCB BSwitzerland Federal Commission of Banks Single NCB BUnited Kingdom Financial Services Authority Single NCB BUnited States 

Office of the Comptroller of the Currency, Federal Reserve System,Federal Deposit Insurance Corporation, and each state's bank supervisory authority

Multiple CB 

Summary Characteristics for High Income Countries 83% Single 50% CB 42Upper Middle IncomeArgentina Central Bank of Argentina, Superintendency of Financial and Foreign Exchange Institutions Multiple CB Botswana Bank of Botswana Single CB Brazil Central Bank of Brazil Single CB Chile Superintendency of Banks Single NCB Czech Republic Czech National Bank, Committee for Securities Multiple CB 

67
Table 4. The Structure, Scope, and Independence of Bank Supervision Around the World 

Country Bank Supervisory Authority 

Single Supervisor

or Multiple 

Supervisors 

Role of Central 

Bank1

Sco

Supe

Auth

Estonia Bank of Estonia Single CB Lithuania Bank of Lithuania Single CB Malaysia Central Bank of Malaysia Single CB BMauritius Bank of Mauritius Single CB Mexico National Banking and Securities Commission Single NCB BPanama Sperintendency of Banks Single NCB Poland National Bank of Poland, Commission for Banking Supervision Multiple CB Saudi Arabia Saudi Arabian Monetary Authority Single CB BVenezuela Superintendent of Banks and Other Financial Institutions Single NCB Summary Characteristics for Upper Middle Income Countries 79% Single 71% CB 71Lower Middle IncomeBolivia Superintendency of Banks Single NCB BEl Salvador Superintendence of the Financial System Single NCB BGuatemala Superintendency of Banks Single NCB BJamaica Bank of Jamaica Single CB Jordan Central Bank of Jordan Single CB Morocco Bank Al-Maghrib Single CB NPeru Superintendencia de Banca y Seguros Single NCB BPhilippines Central Bank of Philippines Single CB Romania National Bank of Romania Single CB South Africa South African Reserve Bank Single CB Thailand Ministry of Finance and Bank of Thailand Multiple CB Turkey Central Bank of Turkey, Treasury Multiple CB Summary Characteristics for Lower Middle Income Countries 83% Single 67% CB 73Low Income India Reserve Bank of India Single CB Indonesia Bank of Indonesia Single CB Kenya Central Bank of Kenya Single CB Moldova National Bank of Moldova Single CB NNepal Inspection and Supervision Department, Nepal Rastra Bank Single CB Summary Characteristics for Low Income Countries 100% Single 100% CB 100

Source: Barth, James R., Daniel E. Nolle, Triphon Phumiwasana, and Glenn Yago (2003). “A Cross-Country Analysis of the Bank Supervisory Framework and Bank P

Markets, Institutions & Instruments, 12(2), pp.67-120, May, (Blackwell Publishing Inc., Malden MA)Notes: 

1 "CB" indicates that the central bank is a banking supervisory authority; "NCB" indicates that the central bank in not a banking supervisory authority.

68
2 "B" indicates that the supervisory authority(ies) has(have) responsibility only for the banking industry; "B&S" indicates that the supervisory authority(ies) has (have) r

industry as well as for the banking industry; "B&I" indicates that the supervisory authority(ies) has (have) responsibility for the insurance industry as well as for the bankthat the supervisory authority(ies) has (have) responsibility for the banking, securities, and insurance industries. 

3 Bank supervisory authorities in some states are also responsible for the supervision of other financial service industries. See Courtis (1999) and Conference of State Ba

the passage of the Gramm-Leach-Bliley Act (GLBA) in November 1999, the Federal Reserve has served as the "umbrella regulator" of financial holding companies that 

banks, securities firms, insurance companies, merchant banks, and other financial affiliates. See Barth, Brumbaugh, and Wilcox (2000) for a discussion of the major com

1999 data for the United States is pre-GLBA.

4 The Australian Prudential Regulation Authority has responsibility for the banking and insurance industries, while the Australian Securities and Investments Commissio

insurance, and securities firms. 

69
Table 5. Implementation of Banking Supervision Around the World

Country Frequency of On-Site Exams at

Large and Mid-Size Banks 

Number of Professional Bank

Supervisors per Institution 

Banking Assets per 

Professional Supervisory 

Staff 

(US$ Billions) 

High Income 

Australia Every 2 years 2.00 12.58 

Belgium Annually 0.67 12.90

Canada Annually Not reported N/A

Cyprus Annually 1.50 0.43

Denmark Every 3 to 4 years 0.16 7.06 

Finland Annually 0.09 2.11

France Cannot be disclosed Can not be disclosed N/A 

Germany Annually 0.22 9.06

Greece Every 2 years 4.70 1.55 

Israel Every 3 years Not reported N/A 

Italy Every 5 years 0.43 4.33 

Japan Every 2 years 1.19 20.61 

Korea Annually 5.70 0.77

Luxembourg Not reported 0.20 15.03

Netherlands Annually 0.13 13.10

New Zealand Inspections are never done 0.60 8.25 

Portugal Depends on actual type of onsite 

inspections 2.40 1.66

Singapore Depends on the condition of the banks 0.72 6.81 

Slovenia Annually 0.20 0.65

Spain Large banks are inspected regularly;

the rest every 3 years 0.60 3.50

Sweden Not reported 0.55 26.53

Switzerland Not reported Can not be disclosed N/A 

United Kingdom FSA does desk-based monitoring with 

on-site reviews made periodically 0.66 14.24

United States Annually 0.32* 4.32* 

Average 1.15 8.27 

Upper Middle Income

Argentina Annually 2.44 0.54

Botswana Every 2 years 9.00 0.05 

Brazil Every 2 years 4.00 0.51 

Chile Annually 3.50 0.46

Czech Republic Every 2 years 2.00 0.70 

Estonia Annually 2.50 0.20

Lithuania Annually 0.80 0.08

Malaysia Annually 4.70 0.77

Mauritius Annually 3.00 0.27

Mexico Every 2 years 11.50 0.24 

Panama Every 2 years 0.61 0.73 

Poland Every 3 years though the aim is 1 

every 2 years 0.50 0.17

Saudi Arabia 

One every year for specialized and 

high-risk areas of a bank; two every 

year for all banks 

7.00 1.71

Venezuela Annually 1.00 0.06

Average 3.75 0.46 

70
Table 5. Implementation of Banking Supervision Around the World

Country Frequency of On-Site Exams at

Large and Mid-Size Banks 

Number of Professional Bank

Supervisors per Institution 

Banking Assets per 

Professional Supervisory 

Staff 

(US$ Billions) 

Lower Middle Income

Bolivia Annually 6.00 0.07

El Salvador Annually 1.00 0.13 

Guatemala Annually 2 to 3 0.05 

Jamaica Annually 1.40 0.07

Jordan Annually 3.00 0.25

Morocco Every 3 years 3.00 0.52 

Peru Annually 3.60 0.23

Philippines Annually 7.00 0.19

Romania Every 2 years 2.00 0.09 

South Africa Annually 3.00 4.53 

Thailand Annually 8 to 12 0.29 

Turkey 

Whenever there is a need based on offsite inspection 0.40 5.07

Average 3.04 0.96 

Low Income 

India Annually 5 to 6 0.27 

Indonesia Annually 3.00 0.47

Kenya Every 2 years 1.00 0.12 

Moldova Not reported 1.10 0.02

Nepal Every 2 years 4.00 0.03 

Average 2.28 0.18 

Source: Office of the Comptroller of the Currency and the World Bank 

Note: * Calculations refer to National Banks only. 

71
Table 6. Key Features of Deposit Insurance Schemes Around the World 

Country Date Enacted / 

Revised 

Coverage 

Limits 

Coverage Ratio 

Limit/GDP per 

Capita 

CoInsurance Type of Fund Risk-Adjusted

Premiums 

Type of 

Membership 

High Income 

Australia N/A N/A N/A N/A N/A N/A N/A

Belgium 1974/1995 $16,439 1 No Funded No Compulsory

Canada 1967 $40,770 2 No Funded No Compulsory

Cyprus N/A N/A N/A N/A N/A N/A N/A

Denmark 1988/1998 $21,918 1 No Funded No Compulsory

Finland 1969/1992/1998 $29,435 1 No Funded Yes Compulsory

France 1980/1995 $65,387 3 No Unfunded No Compulsory

Germany 1966/1969/1998 $21,918 1 Yes Funded No Compulsory

Greece 1993/1995 $21,918 2 No Funded No Compulsory

Israel N/A N/A N/A N/A N/A N/A N/A

Italy 1987/1996 $125,000 6 No Unfunded Yes Compulsory

Japan 1971 N/A N/A No Funded No Compulsory

Korea 1996 N/A N/A No Funded No Compulsory

Luxembourg 1989 $16,439 0 Yes Unfunded No Compulsory

Netherlands 1979/1995 $21,918 1 No Unfunded No Compulsory

New Zealand N/A N/A N/A N/A N/A N/A N/A 

Portugal 1992/1995 $16,439 1 Yes Funded Yes Compulsory

Singapore N/A N/A N/A N/A N/A N/A N/A

Slovenia N/A N/A N/A N/A N/A N/A N/A

Spain 1977/1996 $16,439 1 No Funded No Compulsory

Sweden 1996 $31,412 1 No Funded Yes Compulsory

Switzerland 1984/1993 $19,700 1 No Unfunded No Voluntary

United Kingdom 1982/1995 $33,333 1 Yes Unfunded No Compulsory

United States 1934/1991 $100,000 3 No Funded Yes Compulsory

Upper Middle Income

Argentina 1979/1995 $30,000 3 No Funded Yes Compulsory

Botswana N/A N/A N/A N/A N/A N/A N/A

Brazil 1995 $17,000 4 No Funded No Compulsory

Chile 1986 $3,600 1 Yes Unfunded No Compulsory

Czech Republic 1994 $11,756 2 Yes Funded No Compulsory

Estonia 1998 $1,383 0 Yes Funded No Compulsory

Lithuania 1996 $6,250 2 Yes Funded No Compulsory

Malaysia N/A N/A N/A N/A N/A N/A N/A

Mauritius N/A N/A N/A N/A N/A N/A N/A

Mexico 1986/1990 N/A N/A No Funded No Compulsory

Panama N/A N/A N/A N/A N/A N/A N/A

Poland 1995 $1,096 0 Yes Funded No Compulsory

Saudi Arabia N/A N/A N/A N/A N/A N/A N/A 

Venezuela 1985 $7,309 2 No Funded No Compulsory

Lower Middle Income

Bolivia N/A N/A N/A N/A N/A N/A N/A

El Salvador 1999 $4,720 2 No Funded Yes Compulsory

Guatemala N/A N/A N/A N/A N/A N/A N/A

Jamaica 1998 $5,512 2 No Funded No Compulsory

Jordan N/A N/A N/A N/A N/A N/A N/A

Morocco N/A N/A N/A N/A N/A N/A N/A

Peru 1992 $21,160 9 No Funded Yes Compulsory

72
Table 6. Key Features of Deposit Insurance Schemes Around the World 

Country Date Enacted / 

Revised 

Coverage 

Limits 

Coverage Ratio 

Limit/GDP per 

Capita 

CoInsurance Type of Fund Risk-Adjusted

Premiums 

Type of 

Membership 

Philippines 1963 $2,375 3 No Funded No Compulsory

Romania 1996 $3,600 2 No Funded Yes Compulsory

South Africa N/A N/A N/A N/A N/A N/A N/A 

Thailand N/A N/A N/A N/A N/A N/A N/A

Turkey 1983 N/A N/A No Funded Yes Compulsory

Low Income 

India 1961 $2,355 6 No Funded No Compulsory

Indonesia N/A N/A N/A N/A N/A N/A N/A

Kenya 1985 $1,757 5 No Funded No Compulsory

Moldova N/A N/A N/A N/A N/A N/A N/A

Nepal N/A N/A N/A N/A N/A N/A N/A

Source: Demirgüç-Kunt, Asli and Tolga Sobaci (2001). “Deposit Insurance Around the World,” The World Bank Economic Review, 15(3),

pp.481-490.

73
Table 7. Corporate Governance in Banking Around the World

Country Strength of External 

Audit 

Bank Accounting 

Transparency 

External Ratings 

and Creditor 

Monitoring 

Corporate 

Governance Index 

High Income

Australia 4 5 2 11

Belgium 6 3 1 10

Canada 5 4 2 11

Cyprus 6 3 1 10

Denmark 6 4 1 11

Finland 5 5 2 12

France 5 2 1 8

Germany 6 2 2 10

Greece 5 3 1 9

Israel 3 5 1 9

Italy 2 4 1 7

Japan 3 4 2 9

Korea 3 4 2 9

Luxembourg 6 4 1 11

Netherlands 5 4 1 10

New Zealand 3 4 2 9

Portugal 5 4 2 11

Singapore 6 5 1 12

Slovenia 6 3 1 10

Spain 4 4 2 10

Sweden 5 3 1 9

Switzerland 6 5 1 12

United Kingdom 4 5 2 11

United States 5 4 2 11

Average 4.75 3.88 1.46 10.08 

Upper Middle Income

Argentina 6 3 2 11

Botswana 5 4 2 11

Brazil 5 4 2 11

Chile 4 3 1 8

Czech Republic 5 2 1 8

Estonia 6 4 1 11

Lithuania 4 4 1 9

Malaysia 6 4 2 12

Mauritius 5 4 1 10

Mexico 4 3 1 8

Panama 5 4 1 10

Poland 4 4 1 9

Saudi Arabia 6 5 2 13

Venezuela 5 3 1 9

Average 5.00 3.64 1.36 10.00 

Lower Middle Income

Bolivia 4 4 1 9

El Salvador 6 4 1 11

Guatemala 3 2 1 6

Jamaica 6 4 0 10

Jordan 6 4 1 11

74
Table 7. Corporate Governance in Banking Around the World

Country Strength of External 

Audit 

Bank Accounting 

Transparency 

External Ratings 

and Creditor 

Monitoring 

Corporate 

Governance Index 

Morocco 4 4 1 9

Peru 6 4 1 11

Philippines 3 5 0 8

Romania 5 2 2 9

South Africa 5 5 1 11

Thailand 3 3 1 7

Turkey 6 3 1 10

Average 4.75 3.67 0.92 9.33 

Low Income 

India 4 3 1 8

Indonesia 5 3 2 10

Kenya 6 2 0 8

Moldova 6 3 0 9

Nepal 5 2 0 7

Average 5.20 2.60 0.60 8.40 

Source: World Bank and Caprio and Levine (2002).

Notes: The Strength of External Audit index adds one for an affirmative answer to each of the following questions: 1) Is an external audit 

required?; 2) Are auditors licensed or certified?; 3) Do supervisors receive a copy of the auditor’s report?; 4) Can supervisors meet with auditors 

without prior approval by the bank?; 5) Are auditors legally required to report bank misconduct to supervisors?; 6) Can supervisors take legal 

action against external auditors? The Bank Accounting Transparency index adds one for an affirmative answer to each of the following 

questions: 1) Are financial institutions required to produce consolidated accounts covering all bank and any nonbank financial subsidiaries?; 2) 

Are off-balance sheet items disclosed to the public?; 3) Must banks disclose their risk management procedures to the public?; 4) Are bank 

directors legally liable if information disclosed is erroneous or misleading? In addition, this index adds one for a negative response to the 

following question: Does accrued, though unpaid interest or principal enter the income statement while a loan is still nonperforming? The

External Ratings and Creditor Monitoring index adds one for an affirmative answer to the following question: Is subordinated debt allowable or

required as a part of capital? The index also adds one if the top 10 banks in the country are rated by an international credit rating agency. The 

Corporate Governance Index is the sum of these component indexes.

75
Figure 1. Bank Assets Relative to Total Financial Assets in Selected Countries 

Czech Republic

Singapore

Portugal

Indonesia

Poland

Germany

Argentina

New Zealand

Belgium

Thailand

Switzerland

Netherlands

Taiwan

Hong Kong, China

Spain

United Kingdom

Brazil

Italy

Australia

Turkey

France

Mexico

Korea S.

Japan

Canada

India

Malaysia

Philippines

Denmark

Sweden

Greece

South Africa

Finland

United States

0 10 20 30 40 50 60 70 80 90

Percent

Source: Bank Assets, OCC and World Bank; Bonds, Size and Structure of the World Bond Market, 2000, Merrill Lynch; Market Capitalization,

Emerging Stock Markets Fact Book, Standard & Poor’s. 

76
Figure 2. Incidence of Banking Crises and Banking Problems Around the World – Late 1970s - Present 

Nonsystemic Banking Crises 

Information not Available 

Systemic Banking Crises 

Source: Caprio, Gerard and Daniela Klingebiel (2003). “Episodes of Systemic and Borderline Banking Crises,” World Bank, January. 

Figure 3. Costs of Banking Crisis as a Percent of GDP 

Argentina (1980-1982)

Indonesia (1997-present)

Chile (1981-1983)

Thailand (1997-present)

Uruguay (1981-1984)

South Korea (1997-present)

Côte d’Ivoire (1988-1991)

Venezuela (1994-1997)

Japan (1992-present)

Mexico (1994-present)

Malaysia (1997-present)

Slovenia (1992-1994)

Brazil (1994-1996)

Philippines (1983-1987)

Bulgaria (1996-1997)

Ecuador (1996-present)

Czech Republic (1989-1991)

Finland (1991-1994)

Hungary (1991-1995)

Senegal (1988-1991)

Norway (1987-1993)

Spain (1977-1985)

Paraguay (1995-present)

Colombia (1982-1987)

Sri Lanka (1989-1993)

Malaysia (1985-1988)

Sweden (1991-1994)

Indonesia (1992-1994)

Poland (1992-1995)

United States (1981-1991)

Ghana (1982-1989)

Turkey (1982-1985)

Thailand (1983-1987)

Australia (1989-1992)

Turkey (1994)

New Zealand (1987-1990)

France (1994-1995)

Argentina (1995)

Egypt (1991-1995)

Philippines (1998--present)

0 10 20 30 40 50 60

Percent

Source: Honohan, Patrick and Daniela Klingebiel (2001). “Controlling the Fiscal Costs of Banking Crises,” in Daniela Klingebiel and Luc 

Laeven, editors, Managing the Real and Fiscal Effects of Banking Crises, World Bank Discussion Paper No. 428.